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Wed 14th Sep 2016 - Update: Hotel market analysis, Everyman
Jamie Rollo – ‘London’s summer trading improvement in the hotel market may not be sustained, Whitbread the quality operator’: Morgan Stanley leisure analyst Jamie Rollo has said London’s summer trading improvement in the hotel market may not be sustained and views Whitbread as the quality growth operator. Following a field trip to London to see the operations of Whitbread, IHG, Accor and Travelodge, he said: “Recent trading improvement: All the hotels we saw have been recently running at over 90% occupancy, and the outlook from the general managers was positive. The London hotel market saw revpar improve from -3.5% in the first half to +1.5% over July and August. Most operators saw this as a transitory improvement, reflecting events (Farnborough added circa 1%), sterling weakness (boosting both ‘staycations’ and inbound tourism), and displacement from European cities that have suffered terrorist incidents. The summer ended poorly in London though (-8.5% week-ending 3 September), and there were some events last year that mean the comparatives now get quite tough (particularly the Rugby World Cup). Corporate demand over the next few months should give a better indication of underlying hotel demand than the leisure-driven summer, and while no operator admitted to any post-Brexit vote corporate weakness, visibility is low. Whitbread pointed out that operators with lower occupancy, lower supply growth and that are more upscale likely benefited more from the summer rebound. Commentary about trading in the UK regions was more positive (first half +2.6% to +3.1% last ten weeks for the market), and regions’ average daily rate is still 10% below the 2008 peak in real terms. Expansion plans: All operators were looking for strong expansion, and all have an active pipeline equivalent to mid to high single digit unit growth. According to AM:PM, London net supply will be 4.3% this year, and regional supply growth 1.3%, giving 1.9% for the UK market (13,000 rooms). These four companies account for the lion’s share of these openings. Premier Inn sounded reasonably confident in its 85,000 2020 room target (65,000 system plus 15,000 pipeline currently), but did note that ‘nothing is set in stone’ and its financial strength comes first. At 77% occupancy, the UK hotel market has much higher occupancy levels than other developed markets, and half the rooms are independent, suggesting plenty of scope for further branded hotel demand. Online travel agents (OTAs): The proportion of revenues going through OTAs varies widely at 2% for Travelodge, 6% for Premier Inn, 14% for IHG and 20% for Accor. Premier Inn now captures a record 86% of bookings directly through its website, and this should help the new yield management system it has just rolled out. IHG launched ‘Your Rate’ earlier this year, and has seen its direct web growth rate improve by 2% and OTA growth rate weaken by 2%, with no adverse impact on revpar. Accor’s expansion of the ‘market place’ is progressing well in the UK, and the company sees this as a key way to both increase the attraction of its website (by offering a broader range of quality-assured hotels), as well as increasing the monetisation of its website traffic (by taking commissions from hotel bookings for independent hotels). Alternative accommodation channels: None of the hoteliers said Airbnb had an impact on their business, and none sounded particularly worried. The companies said there is little overlap in terms of product (the average hotel stay is for one to two nights and mainly corporate, Airbnb is longer duration and mainly leisure) and geography (main price differential is in city centres where economy hotels underindex). Our research is more mixed and hoteliers need to avoid complacency. Capital allocation: Premier Inn plans to spend another £185m on maintenance capex this year and continue to convert the older ID1/ID2 room design to ID4, and with maintenance capex at a record 10% of revenue and well above depreciation, some questioned the return on this spend. Whitbread is becoming increasingly focused on efficiency, and last week announced its hotels and restaurants managing director would be departing as part of the new chief executive’s delayering initiative. Since Accor announced plans to sell a majority stake in HotelInvest, there has been lots more focus on why Whitbread owns so many of its hotels. While the company defended this with both strategic and financial logic, this is a growing theme given record low yields and the shares’ discount to their sum-on-the-parts. View on the major hotel stocks: We see Whitbread (‘Overweight’) as the quality growth operator (superior hotel occupancies, direct distribution, TripAdvisor scores, unit growth, and freehold backing), recent trading has been solid, the new chief executive is focused on internal efficiencies, and the shares trade at a significant discount to their sum-of-the-parts. We see IHG as a pure play on the US cycle now it has sold most of its assets, and the stock has rerated to its fee-income peers, meaning we see little upside at a time when the US hotel cycle is gently slowing. We see Accor as the sector’s restructuring story, with the upside from a HotelInvest separation, possible cash return and industry consolidation balanced against weak trading, high expectations, and an unattractive leasehold business.”

Cinema operator Everyman reports turnover up 49%: Cinema operator Everyman Group has reported revenue for the six months to 30 June 2016 was up 49% to £12.1m (2015: £8.2m). One new venue was added in the period and two since the period end, expanding the current estate to 19. The company has exchanged on new sites in Horsham, which is expected to open in 2018, and Durham and Wokingham, which are both due to open in 2019. It was previously expected that a new venue in Cirencester would open in 2017, however, the longstop date in the contract was reached without necessary conditions being satisfied, so it has exercised its option to exit the lease. Chairman Paul Wise said: “The first six months to 30 June 2016 saw us open a new venue in Bristol together with significant maturing revenue growth coming from the six venue openings and two refurbishments in 2015. A temporary one-screen venue opened in July 2016 in Kings Cross, which will remain in place until the permanent venue is completed in late 2017. A five-screen venue opened in Harrogate in September 2016. Since the period-end, trading has been in line with expectations following a good overall summer release slate in the cinema market set against a weak comparable period in 2015. We feel that Everyman is enhancing its position as a well-respected brand in the UK leisure market and is attracting increased interest from developers looking for a cinema/leisure operator that appeals to a more discerning customer within a more intimate environment.”

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