Business Irish

Monday 9 December 2019

Melia's a hot spot for investors as tourism picks up once more

Tourism picks up once more

Dr John Lynch

IN business, the task of mopping up in the aftermath of a calamitous crash can be sad and painful. But it's mostly unavoidable. It can also, dare we say it, throw up interesting investment opportunities.

The situation in the hotel sector is a case in point as the recent flotation of the Irish hotel group Dalata has shown. Of course, Ireland is not the only place where the crash devastated the hotel industry.

Pretty much the same thing happened in Spain and there a recovery story, not unlike Dalata, is playing out. The particular Spanish hotelier that caught my eye was Melia Hotel International SA (Melia) because it has just announced its 14th consecutive quarter of growth.

I fancy this group has the growth potential and the scale to make it an interesting speculative investment.

Melia is the third largest hotel group in Europe after Intercontinental Hotels and the French group Accor. The company owns and manages hotels and resorts, with a presence in Europe, Asia, Americas and Africa. Valued at €1.70bn, it employs 38,000 people and has a total of 320 hotels globally.

The group had its origin in the great Mediterranean mass tourism boom of the 1960s. The first Melia hotel was built in Majorca and it followed this with explosive growth first in mainland Spain and farther afield in the '80s.

It became a listed company on the Spanish stock market in the 1990s and the founding family, the Escarrers, are still involved in the company and retain a majority of the shares.

The group's target markets are both business and leisure, the latter accounting for 60pc of sales. As with most hotel groups, it caters for all tastes. So, half of Melia hotels are in the three-star segment, a quarter are in the four-star bracket, with the remaining quarter catering for the so-called premium customers. The group has many brands including Sol Melia, its principal brand for tourist destinations like the Mediterranean, Caribbean and the Canary Islands.

Its main business brands are Melia and Tryp by Wyndham, and the latter is focused on the major 'gateway' cities like New York, London, Milan and Sao Paulo. The company has many other brands like Innside, ME, and its premium brand called Gran Melia hotels, the most luxurious in the group.

Melia seems to have recovered well from the dark days of 2008 when tourist numbers fell away. The group's British customers were impoverished by a weak pound; the Germans were worried by recession (though perhaps not worried enough by the recession in Ireland); and the Spanish were laid low by their own economic collapse. Since then, the group has revised its strategy. It moved its hotel offering to the premium end of the market, diversified to growth markets like Latin America and Asia and concentrated on the management of hotels rather than owning them.

Today, it owns only a quarter of its portfolio of hotels; management contracts account for over 60pc, and the remaining hotels are on long-term leases.

The Melia Group revenue of €1.3bn increased by 1.7pc last year, helped by the strong performance of its hotels, but real-estate revenue was flat.

Operating profit was up 8pc with Latin America resorts accounting for over half of the operating profits, followed by Europe contributing a quarter. Overall, the group showed a small loss, due to the impact of exceptional items.

Looking ahead, the company is planning an additional 60 hotels, mostly outside Spain, in the premium end of the market and based on management contracts or leases. The outlook for this year is for mid-to-high single-digit growth and an improvement in margins. Latin America will show double-digit revenue growth, but the tourism business and Spanish resorts won't match that. Business in European gateway cities should be better.

To help reduce its debt, the group plans to dispose of assets worth €125m this year.

Melia's share price of €9.30 reflects the improved outlook for the group; the price is just below its recent high of €10. That's double that of two years ago but only half of its share price seven years ago.

Overall, Melia could be an interesting punt as the world gets back to normal and Spanish tourism recovers.

Nothing published in this section should be taken as a recommendation, either explicit or implicit, to buy or sell any of the shares mentioned.

Irish Independent

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