Worth checking in to hotels

THE INVESTMENT COLUMN
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The Independent Online
The UK hotel industry has come under the spotlight again this week, with analysts focusing once more on the murky area of companies' depreciation policies, or lack of them, on their freehold and long leasehold properties.

Such is the complexity of the issue that the industry is likely to have ploughed through another trading cycle before hotel owners and the Accounting Standards Board agree an acceptable formula.

The problem is that it is impossible to apply a broad-brush depreciation policy to the hotel industry. At one end of the spectrum, it is probably fair to assign a limited life to the new crop of budget lodges - like the supermarkets that have recently bitten the depreciation bullet, they will probably fall down in 50 years and should rightly be amortised at 2 per cent a year.

At the other end, however, the life of the Savoy has to be measured in centuries, not years, and it has an ongoing intrinsic worth.

Concern about the quality of hoteliers' accounts provides bountiful grist for the headline mill, but there is a real danger that it will distract from the big picture, which is looking brighter than for some years.

Shares in hotel companies have underperformed the market by 50 per cent in the past five years, but that figure masks progress made by several companies because it is an average and includes some spectacular disasters.

Stripping out the likes of Queens Moat, there is a seam of hotel and leisure companies that, after an extensive reassessment during the recession, are poised to deliver solid, and sustainable, earnings growth.

Results for the year to 31 January from Forte next week should further underline the positive trading news that has flowed from hotel groups since last summer. Tourists have flooded back to London, and hotels in the capital are now achieving occupancy levels above 80 per cent. Forte's profits, despite the Mary Celeste appearance of hotels in some parts of Europe, are expected to rise from a depressed £87m to £126m.

Business traffic has also started to recover in the provinces, although the chances of increasing room rates by any meaningful amount are slim. And discretionary spending in hotels' restaurants and even mini-bars has yet to show a significant recovery.

Much of the pick-up in occupancy can be attributed directly to self-help by hotel operators rather than the re-emergence of a feelgood factor.

The big three operators, Forte, Bass and Ladbroke, and a clutch of other operators, notably the big pub and brewing groups like Whitbread and Greenalls, have spent fortunes on improving quality at top hotels and on creating better value for money, such as rooms priced at a flat £39.50 a night for up to four people.

Vast resources have also been used to upgrade booking systems and cultivate the short-break concept, principally aimed at the so-called "grey market" of the relatively wealthy over-50s.

The latest in-depth annual review of the industry, published this week by Kleinwort Benson Securities, calculates that quoted hotel companies grew trading profits by 26 per cent last year and should show a further 15.5 per cent advance this year.

On the buy list at Kleinwort and several other broking houses, are Forte, Ladbroke, Stakis and Greenalls.

Investors are being advised not to ckeck-in to Bass, owner of Holiday Inn, and Whitbread, which is building Travel Inns at a rate of knots, until the Office of Fair Trading's inquiry into beer supply prices is concluded.

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