Peel Hotels

AVOID

07/04/2004

Hotel operator Peel Hotels claims low inflation and a flat economy is preventing substantial turnover growth for its six hotels. Pre-tax profits for the year to February slumped 20% to �1.41m despite a 9.7% increase in turnover to �12.1m. Total sales on a like-for-like basis rose 3.6% and accommodation revenue per room increased 2%. �1.3m was spent on improving and upgrading the hotels, of which those in Bristol, Bradford and Newcastle performed well. However, the hotels in Peterborough and Wallingford were flat and the Golden Lion in Leeds suffered from intense competition. This year, the company will lose its management contract income, as the five Grace hotels it manages will be sold. Its interest on its borrowings has increased - net debt stood at �16.6m (�16.75m) in February - as it has a 'cap and collar agreement' in place, which incurs higher costs until interest rates rise to 4.99% and above. Its average cost of borrowing moved up to 6.32% plus a margin of 1.25%. Peel intends to sell its Leeds investment in Aire House, although it has permission for the building of 45 hotel rooms on the site. It has stated that it is reviewing acquisition and management contract opportunities. House broker KBC Peel Hunt expects pre-tax profits to rise to �2m in 2005. While an EPS of 12.04 provides a reasonable p/e of 7.3, we're not convinced. Avoid for the moment.