View from City Road: Financing a night at the Ritz

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IN 1989, 52 Trafalgar House shares would buy one night at its flagship Ritz hotel; today it would take 10 times as many. That is not because of rampant inflation in the hotel business but because Trafalgar's shares have collapsed from their 1989 peak of 423p to just 43p yesterday, leaving the company worth just pounds 283m - pounds 27m less than last year's rights issue. On any normal measure, that looks ridiculously cheap. The prospective yield, even on a dividend slashed from 18.4p to 6p, is 18.6 per cent while the forward multiple is less than 5 times. But investors no longer believe that Trafalgar should be judged by normal measures.

The acquisition of Davy last year now looks a costly mistake, despite the claim that the risk was strictly controlled. It will absorb pounds 100m of cash this year, contributing to a rise in borrowings to about pounds 550m compared with last year's pounds 382m. That raises questions about Trafalagar's claims that contracting is a strong cash-generator - particularly as the outflow is likely to continue next year.

There are also worries about the management of the rest of the group. In effect Cunard and the hotels have a for-sale sign over them, but buyers are thin on the ground. The mooted demerger of these businesses looks little more than a smoke- screen given that they account for almost pounds 400m of the assets, but contribute only pounds 13m to operating profits, so supporting little of the group's debt.

The property business looks unattractive. It is absorbing cash, the portfolio's value is likely to fall further this year, and it will require substantial further investment if it is to earn a decent return. Housing is being run down; while it may produce cash, it will make little, if anything, in profits.

The main, if distant hope, is that someone will bid. Applying a multiple of 12 to prospective post-tax profits of pounds 69.8m gives pounds 837.6m, almost three times the current market share price. But, regardless of fears about future trading, it is difficult to think of a buyer interested in the whole business.

A growing number of shareholders say the departure of Sir Nigel Broackes, chairman, and Sir Eric Parker, chief executive, would be almost as beneficial as a bid. They were on holiday yesterday, as was John Ansdell, finance director, suggesting Trafalgar does not find its current problems too pressing. Shareholders should join them and cash in their shares for a night at the Ritz. It is likely to be far more comfortable than staying on board.

(Photograph omitted)