M&C in recovery mode

For the ever-cyclical hotels industry, the Asian economies offer the best prospects for recovery and holding shares in hotels group Millennium & Copthorne looks the best way to play this, especially as its results for 2009 highlight the attraction of the group's asset value. Millennium derives 34 per cent of its revenues and 51 per cent of its operating profit from Asia; if the contribution from associates and joint ventures are added in, Asia makes up 60 per cent of headline operating profit. Then Australasia makes up another 6 per cent of revenues and 10 per cent of hotels profit.

Asia has not been immune to the impact of the credit crunch. Last year Singapore, which is a major market for Millennium and accounts for 23 per cent of hotels operating profit, was the worst hit of the group's seven trading regions. Revenue per available room (RevPAR), a key performance measure, plummeted 32 per cent in 2009. However, the collapse needs to be seen in the context of several years of stupendous growth - RevPAR grew at 27 per cent per year compound from 2003. And now the worst seems to be over. Year-on-year, the drop in RevPAR was at its worst in the second quarter of 2009 - down 45 per cent - by the fourth-quarter the decline had steadied to 19 per cent. And in the first five weeks of 2010, RevPAR rose by 19 per cent year-on-year.

The rest of Asia fared better than Singapore. RevPAR dropped only 5.6 per cent and managed a 3.2 per cent rise in the final quarter, which made it Millennium's strongest performing region in the period. The strong showing from Asia tallies with the experience of other hotels groups and adds to the impression that this is where recovery prospects look best.

Millennium's recovery in Europe and the US looks more fragile, though there are signs that trading is stabilising. London was actually the group's best-performing region last year thanks largely to the weakness of sterling attracting overseas visitors. However, it has begun 2010 by registering an 8 per cent RevPAR decline it the first five weeks. By contrast, New York, which accounted for 15 per cent of 2009's revenue but just 6 per cent of hotel profits, has seen a 4 per cent pick up in RevPAR since the turn of the year following a grizzly 28 per cent decline in 2009.

Millennium's performance has also been boosted by substantial cost cutting. Indeed, in 2009 management offset 55 per cent of the £132m fall in revenues with cost cuts. These tight controls should position Millennium to benefit substantially from a recovery, especially as hotels operate with high fixed costs so just a small rise in revenues will mean a big boost for profits. And stockbroker Evolution reckons earnings should double from the trough point in the cycle - 2009 - to the peak.

However, Millennium's shares are not only a recovery play. The group owns as well as manages hotels and possesses a number of extremely valuable assets. The balance sheet value of these assets has not been updated since 2004. However, at the full-year stage management noted that 46 per cent of the hotel portfolio by value had been reviewed by external valuers and would have created a £171m surplus if the revaluation had been taken onto the group's balance sheet. Broker Liberum Capital puts an "understated" net asset value on the group at 614p per share, yet the share price is 32 per cent below that level.

What's more, ownership of hotels gives management the potential to generate value through canny deals. For example, Millennium will turn a hotel in Singapore into condominiums to sidestep £10m of maintenance work and to produce cash and a profit from the asset. Millennium is also well financed, which should provide it with opportunities to invest in order to boost earnings growth.

True, it would not be easy for outsiders to unlock the value since 53 per cent of the equity is owned by the chairman, Kwek Leng Beng. Millennium also has a reputation for churning chief executives.