Halfway figures the other day from Millennium & Copthorne were distorted by the closure of a hotel in London during the previous period and it was hard enough to discern the general direction of travel, though it seemed favourable. Its larger rival Intercontinental Hotels also claims a distorting factor, the falling of Easter in its second quarter this year.
Intercontinental is reliant on the business traveller and businessmen don’t tend to go to meetings at Easter, was the argument. So revenue per available room, or revpar, as ever the metric to judge performance, was up 2.7 per cent in the first quarter but just 1.5 per cent in the second.
In America the effect was even more pronounced. Revpar in the US, up 1.9 per cent in that first quarter, actually went into a 0.4 per cent decline in the second. It is not too clear how much of this really was Easter, and such businesses are generally better judged on a longer term view. The driving factors are obviously the ability to fill those available rooms and the number of rooms that can be added.
The latter grew by 3.7 per cent in the first half, which sent underlying operating profits ahead by 7 per cent to $365 million. The larger the estate, the more margins are enhanced by savings on procurement and the like, and these went ahead by 2.4 percentage points to 51.0 per cent, though Intercontinental is guiding towards a longer term improvement of about 1.35 percentage points.
Hotels are a classic cyclical business because rising demand brings further capacity into the market as hoteliers are encouraged to provide more rooms, which can cause upsets when that demand reduces. The sector has had a generally benign few years and there are signs that supply is picking up again, especially in the US.
Advertisement
That said, Intercontinental operates an “asset light” model where the hotels are owned by third parties and either operated or franchised by the company. There is also the prospect of market share gains from the new midscale brand being rolled out in the US. This model allows the return of plenty of excess capital to investors, $400 million paid in May by means of a special dividend. The halfway dividend is ahead by 10 per cent too.
The shares had risen by almost 20 per cent since the start of the year so some profit-taking was probably due and they lost 176p to £42.35. They still sell on almost 24 times earnings, which looks full value.
MY ADVICE Avoid
WHY The company’s asset-light model is attractive and means regular cash returns to investors, but the shares are highly valued
Rotork
A fortnight ago Rotork parted company with its long-serving chief executive, Peter France, and its chairman, Martin Lamb, the former head of IMI, took over while a successor is found. It is not entirely clear from the halfway figures why. Rotork makes valves and actuators, half of its revenues coming from the oil and gas industry, and those revenues and margins have clearly been under pressure.
The halfway figures, though, show that while the division affected by that oil and gas downturn is still seeing slower order growth, the other three parts of the business are moving ahead. Even within that oil and gas business there are signs that work is returning, in the US shale sector and in the Middle East.
Advertisement
The share price is also faring well enough. It has recovered from about 160p at the start of 2016 to 233¼p, off 1½p, last night.The problem is that Rotork is no longer growing, with revenues flat at constant currency rates in the first half and adjusted profits before tax actually 7.5 per cent lower at £52 million.
The company used to enjoy among the best margins in the sector, in the mid-20s, a couple of years ago; these will come in at about 20 per cent for this year.
Mr Lamb thinks drastic action is needed in terms of further cost cutting, greater investment in R&D and a refreshing of the product pipeline to serve that oil and gas sector better. The shares have always traded on a high multiple, currently about 22 times earnings, but if those margins can be rebuilt they are an interesting speculative punt.
MY ADVICE Buy
WHY Risky, but there is plenty of potential upside
Pets at Home
Pets at Home had a difficult time at the end of 2016, with sales of the merchandise the company sells through its superstores suffering from competition from online rivals such as Amazon. The chain has always differentiated itself by offering other services, such as grooming and veterinary treatments, to customers who visit those stores and this was providing the real growth, but it was clear something had to be done to make its prices for those basic products more competitive.
Advertisement
The company decided to take an £8 million hit by cutting prices and was rewarded by a 1.5 per cent rise in merchandise in the first 16 weeks of its financial year from the end of March, while those specialist services saw 10.5 per cent growth. The repricing, though, will have an inevitable effect on the current year’s profits, while expansion, ten new superstores with those vet and grooming services in-house, is relatively unambitious in an estate of more than 400.
The shares perked up 9¾p to 182p but are still way below the 245p Pets at Home floated at in March 2014. They sell on 14 times earnings but may have difficulty making much further headway given the competitive pressures in the market.
MY ADVICE Avoid
WHY Rivals look set to continue to take market share
And finally
Shares in Morgan Sindall have enjoyed the sharp gains seen among the other housebuilders even if much of its work is elsewhere, in urban regeneration and the fitting out of offices. The construction activities have been a drag in the past because of the endemic low margins in the industry, though these exceeded 1 per cent in the first half. The interim dividend is ahead by 23 per cent, rather better than expected, while the company had an average of £132 million of cash in the bank over the period.