View from City Road: Lots of room for improvement

Click to follow
SHARES in two of Britain's leading hotel groups, Queens Moat Houses and Forte, were left with little more than one-star ratings by the end of dealings yesterday. Both plumbed fresh depths for 1992, with Forte shedding 7p to 130p and Queens sliding 8p to 57p on disappointing interim results.

While Forte and Queens operate at different ends of the hotels market, both are faced with the same problem - the need to fill rooms. The recession has blown a hole in occupancy levels. Forte, with 85 per cent of its hotels in the UK, has been rattled by a fall-off in tourism.

Queens, heavily dependent on the travelling business community, has suffered badly from cuts in corporate spending. Occupancy levels in the company's 10,624 rooms in the UK fell from 62 to 59 per cent in the half-year to 12 July.

John Bairstow, founder and chairman, openly admits that 60 per cent is unlikely to be recaptured in the second half. Against that, though, underlying UK profits are holding up and even showed an improvement, from pounds 36.3m to pounds 38.7m, with debut contributions from a couple of hotels.

Pre-tax profits were up pounds 2m to pounds 38.1m and the interim dividend is up 4 per cent to 1.39p.

Yesterday's reaction to the figures was driven by concern about an unexpected cash outflow of pounds 53m, taking net debt to pounds 790m and gearing to 62 per cent. Although at least pounds 30m of the rise was explained by Queens' purchase of three hotels, the figures point to the need to stem the outflow.

Queens could well be cornered if recession were to take hold in Germany, which generated pounds 23m of profit in the first half.

Queens' problems, however, are considerably less acute than those at Forte, which will have to put on a brave face to hold its dividend. Downgrading by analysts has become something of a weekly event at Forte. Four months ago it was expected to make profits of pounds 140m, but now it looks set to make only pounds 85m this year, which puts it in an ignominious second place to Queens, which is likely to produce pounds 92m. Forte, it has to be remembered, has a giant-sized 800 hotels compared with Queens' 189.

Thoughts about investing in the hotels sector should carry a health warning. But given that Queens sports a prospective price earnings multiple of 8.5 times and a yield of 6.5 per cent, its shares shine out against Forte's respective numbers of 22 and 10 per cent on a 9.91p unchanged dividend.

(Photograph omitted)