The market spent 2008 savagely de-rating the shares of pub, restaurant and hotel groups ready for a dire 2009. Arguably the most precariously positioned of these three sub-sectors are the pub companies due to the huge debt burdens many of them are having to manage as trading deteriorates.
The first few months of the year are always quiet for the pub industry, but early-year trading in 2009 may well be particularly harrowing. Big managed-pub groups look like they have already begun to wage a major price war with JD Wetherspoon offering pints for 99p and meals for £2.99. Individually-tenanted pubs will find it hard to compete with these offers which is bad news for their landlords, which include the big heavily-indebted tenanted pub groups Punch Taverns and Enterprise Inns.
The pub industry’s aggressive move into the eating-out market to counter the effect of the smoking ban, which came into force in summer 2007, means its price cuts could also add to the woes of restaurant groups. The big increase in eating-out capacity over recent years coupled with discounting could have nasty ramifications for profits as the downturn bites. Recent trading at Restaurant Group, which reported a 5 per cent drop in like-for-like sales in final seven weeks of the year, certainly suggest the going will be very tough in 2009. However, there are reasons for some optimism about the second half of the year as falling utility bills and raw material costs should help support margins, and interest rate cuts may have restored some stability to consumer demand by then.
Hotel groups also face a dismal demand outlook as consumers curb their travel plans and businesses slash employee expense accounts. However, domestic hotels should benefit from the positive effect of sterling’s weakness on tourists’ spending power, and the currency should also give earnings of big dollar earners, such as InterContinental, a boost. However, InterContinental’s model of managing hotels built by third parties may well feel the strain as hotel-development finance disappears. Meanwhile, Whitbread has so far benefited from its strong presence in the budget hotel market, which should help it mitigate some of the problems that 2009 will inevitably bring.
Ultimately shares in these sub sectors should respond well to any signs of stabilising demand and will not wait for an improvement in trading to begin their recovery. The initial stage of any upturn is likely to bring handsome returns. However, at this stage there’s no certainty that 2009 will bring any such stability, and where debts are high, highly-dilutative rights issues are a real risk.
Summary of sector:
