Investment Column: Time to check out of Intercontinental

Pennon Group; Devro
  • @AlistairDawber

Our view: Sell

Share price: 487.25p (12.25p)

Looking at yesterday’s full-year announcement from Intercontinental Hotels, the world’s biggest hotelier, investors would be right to be nervous. Yes, adjusted operating profits were up 13 per cent, which is impressive, and the stock was up 2.6 per cent, but apart from that the investment case is grim.

Even the chief executive Andrew Cosslett said in the group’s results statement that: “The trading environment is very tough. The sharp deterioration that we reported on last November has continued into 2009 and we see no signs of improvement at this stage.”

In fairness there were other pockets of good news. The numbers were in line with analyst expectations and the group says it has exceeded its target to add as many as 60,000 new rooms, by increasing the number on offer by 82,000. However, it is the fourth-quarter numbers that should make buyers nervous. The last three months of 2008 saw revenue-per-room, a key indicator, fall by 6.5 per cent, compared with a 4 per cent increase in the first half.

Watchers at Killik Capital argue that while the yield is not bad, Intercontinental is not a stock punters should be chasing. “The final dividend was increased by 2 per cent to 20.2p giving a full-year 2008 yield of 5.5 per cent. Although the shares are trading on a reasonable rating [of] 8.5 times 2009 consensus earning per share, we feel the continued deterioration and lack of visibility over the timing of a recovery leaves forecasts at risk,” they said. Even the experts at house broker Credit Suisse say the group is the best of a bad bunch: “We have an outperform rating on the basis that we see it as early cycle in the hotel space but would highlight that we remain cautious on the sub-sector.”

Likewise, we see little joy for any investment in the hotel sector and would take the opportunity to get out. Sell.

Pennon Group

Our view: Buy

Share price: 449p (+3.25p)

Pennon, which made it to the FTSE 100 a few weeks ago, had more reason to cheer yesterday as it reported a steady-as-she-goes trading performance since the start of October.

The group is divided into two groups: South West Water and Viridor, a waste management and renewable energy group.

Yes, investors should certainly be aware of the fact that the water utilities are bidding on contracts for 2010 to 2015 and it is not beyond the realms of the impossible that the news will not be good, but the company has a sound balance sheet and at present there is little cause for concern. The group claims that being in the South-west is advantageous as the region depends on few industrial water users and has population growth of about 1 per cent annually.

Viridor is equally upbeat and with £30bn expected to be spent on renewable energy in the next 15 years, it can expect substantial growth, the company claims. It is also the preferred bidder on a £700m PPP deal with Greater Manchester Waste, which is yet more good news for investors.

Despite all the operational reasons to back the group, Pennon’s share price is down a third in the past year. The group says that this is because some peer groups are not performing as well and dragging the stock down.

This should not be ignored by buyers. However, according to Citigroup, the shares are cheap and that should clinch it, “putting Viridor on a six-times enterprise value to Ebitda multiple implies that Pennon is currently trading at a 7.8 per cent discount to [regulated asset base], versus Severn Trent at a 9.9 per cent discount and United Utilities at 6.9 per cent discount.” Buy.


Our view: Buy

Share price: 87p (+3p)

Food, glorious food. Not just Oliver Twist’s song, but also a maxim for investors as food companies manage to buck the trend of the falling market with some impressive results.

The latest yesterday was an impressive set of full-year results from the collagen products producer, Devro, which showed a 16 per cent jump in pre-tax profits and a hike of 3.6 per cent in the share price.

The group does say that it faces some risks, such as banks in Russia starting reduce lending to clients, but on the whole everything is steady: the numbers are in line with expectations and despite saying that the outlook is “interesting” the group remains confident.

The management team, which was appointed in January last year, has an ongoing plan, they say, which involves bringing the debt down. Investors may be annoyed the dividend has not been increased, but the solid performance of the stock should offer some solace.

The house broker Investec says that the group trades on a sector average, and while miffed about the dividend, would still see the food as a good sector and Devro as a good punt. Buy.