Tuesday 21 January 2020

Not all sunshine and sangria for Spain's €1.8bn Melia hotel chain

Share Watch

Since late 2016 investors in Melia have not been happy, as shares have declined, including a 30pc drop this year (stock photo)
Since late 2016 investors in Melia have not been happy, as shares have declined, including a 30pc drop this year (stock photo)

John Lynch

One noisy feature of the post-Christmas business scene in the 1980s and '90s was the elaborate publication of holiday brochures by the raft of tour operators who were around at the time.

Before the internet allowed people to be their own tour operator, the public was inundated every January with offers from organisations like Budget Travel, Joe Walsh Tours and Thompson Tours and many more, to book their summer holidays, hopefully at a discount.

As a business model, the idea of getting partial payment for a service at least six months in advance was splendid. But it also helped nurture the habit that has helped build holiday empires in Spain and other Mediterranean countries, one of which we are looking at today - Spanish hotel group Melia International.

It hasn't been all sunshine and sangria for Spanish and Mediterranean tourism with recessions, terrorist outrages, political unrest and corporate collapses (latest being Thomas Cook) making for an uncomfortable mix.

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The arrival of disruptors like Airbnb has been no help either. The Melia share price has suffered in the midst of that uncertainty but it has also seen the benefit of interesting geographical diversification.

Melia has its origins in the mass tourism boom of the 1960s; it saw explosive growth in the 1980s first in mainland Spain and then further afield. Today the company is the third largest hotel group in Europe, operates in 44 countries, employs 46,000 people, owns/manages 390 hotels and resorts in Europe, Asia the Americas and Africa. It has been a listed company on the Spanish Stock Exchange since the 1990s and valued today at €1.8bn.

Target markets are both business and leisure and like most hotel groups it caters for all tastes from 3-star to premium brand. The group has a number of brands including Sol Melia used mainly in tourist destinations.

Its main business brands are Melia and Tryp, the latter focused on large cities. The premium brands are Pardisus and Gran Melia, the most luxurious. Three-quarters of its property portfolio are "asset light" or leased properties.

The asset-light (or managed) business model is where Melia manages third-party properties for a fee and it accounts for one-third of group earnings. Only 14pc of its properties are owned by Melia and almost one-third is leased.

The group's portfolio of hotels in the Mediterranean, Spain and Europe accounts for 60pc of its total.

The Mediterranean region is Melia's largest with 84 managed hotels and 26,000 bedrooms.

Last year it faced many challenges. The good weather in Northern Europe as well as recovery in other destinations like Turkey and Egypt resulted in a decline in demand. Its European portfolio of 77 hotels posted positive results including a rise in revenue per available room.

The group's hotels in its main markets of London, Paris and Rome had positive results with the exception of the German market which was 'challenging'. In general Melia's urban and premium hotels in Spain had a positive year; Barcelona the exception. The Spanish resorts were hit by the slowdown in international tourism.

The Melia group revenues last year were €2.2bn, up 40pc in the last seven years.

Thirty percent of its revenue is generated via the internet. Since late 2016 investors in Melia have not been happy, as shares have declined, including a 30pc drop this year. Today they trade at €8, just above its yearly low - a long way from €20 before the financial crisis.

Even though the group has added 70 hotels in the last five years, the share price fall is disappointing given the group has moved to the less volatile premium end of the market, diversified to growth markets in Latin America and Asia and concentrated on managing hotels rather than owning them.

However with tight profit margins I wouldn't be rushing to buy the shares.

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

Irish Independent

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