No Pain, No Gain: Our Man's Portfolio, Room in hotels for canny investor

HOTEL SHARES are bombed out. Even the Ladbroke take-over bid for Stakis and the stock market excitement over Greenalls' De Vere Hotels and Vaux's Swallow Hotels has not injected much enthusiasm into a sector which is feeling the cold blast of investment neglect.

The traditional hotel industry - the two, three and four star category - once enjoyed a glamour rating. Now it is a victim of increasing competition from the growth of budget hotels, run by the likes of Granada and Whitbread, as well as suffering from the cutback in consumer spending which has hit most leisure activities.

Few have suffered more than Regal Hotels, rescued from the graveyard as recession gripped the country in the early 1990's. With its colourful history Regal represents an ideal adventure share for the pain portfolio. It should even provide a dash of excitement.

The new style Regal started with a couple of hotels and has since expanded by using its share quote as ammunition for acquisitions. It now has more than 100 hotels. Profits in 1997 were pounds 17.4m and last year's figure should come out, believe Peel Hunt, at around pounds 21.6m, down from earlier estimates.

This year the rapidly changing group could manage about pounds 27m. The shares have firmed slightly in past weeks but at 29.25p, against a recent 25.5p low, they still look very cheap with the 5.6 historic price/earnings ratio not far out of line with the 5.3 dividend yield.

Just how far the group has fallen from favour can be judged by the steepness of its share slide. The price touched 49p last year and at the start of 1997 was 65p. Like Thistle Hotels, the smaller Regal has close Far Eastern links; Regent Corporation, an associate of Malayan United Industries, accounts for 20 per cent and enjoys boardroom representation.

It is possible that Regal's thirst for shareholders' cash to fund its rapid expansion has ruffled market confidence, leaving it more exposed as pressure built up on the hotel industry. Significantly it did not resort to shareholders for its last deal. It acquired Country Hotels for around pounds 42.5m through a joint venture company into which Regal pumped pounds 30m.

Hotels have enjoyed a love-hate relationship with investors. Many chains went belly-up in the 1970's recession. And in the early part of this decade receivers were the nation's biggest hotel keepers as individual hotels and chains failed. Country Hotels was once part of the near terminal Queens Moat Houses, which still struggles under a debt mountain. Regal emerged from the first corporate voluntary arrangement. Resort Hotels crashed when skulduggery was uncovered.

But such costly days of dismay are over for the country's hoteliers and investors. The way Regal's management dragged it out of bankruptcy and then indulged in spectacular expansion (although it possibly overpaid on occasions) should auger well.

Management changes should ensure a period of consolidation which should mean room returns will increase. It is also busy exploiting its bar, health club and restaurant facilities and indulging in a rebranding exercise. Corus is the name chosen for the hotels.

Indeed the three year pounds 80m rebranding has caused some anxiety in the market with Charterhouse Tilney fretting about the pressure the revamp will put on the group's cash flow.

Regal's directors thought about joining the management buy out bandwagon last year. But talks were abandoned. There was also a feeling that perhaps the management was not the only party interested in acquiring the group. It is felt the potential corporate raider has not completely abandoned take over ambitions.

As the Ladbroke descent on Stakis demonstrates, and the Whitbread rumours indicate, there is room for consolidation among the quoted hotel chains. With its shares so depressed Regal, capitalised at nearly pounds 85m, could be vulnerable.

It is, however, a share which requires careful monitoring. If it falls below 20p then investors should run.