Prospects for profit momentum shares

This week we look at businesses that have screened well for upgrade momentum. This can be tricky to assess at the moment as many businesses are experiencing a strong rebound or catch-up post Covid and it is important to determine whether there is a positive underlying story that shows sustainable growth potential after trading has normalised. Very different businesses here again: London real estate, digital marketing and international hotels.

Capital & Counties (CAPC) – CapCo owns large parts of the well-known London tourist and leisure destination Covent Garden. Central London real estate has been hit hard by Covid, Covent Garden arguably more so because it relies so heavily on tourist footfall. Rents fell by 24 per cent and yields rose from 2½ to 3¾ per cent pushing the net asset value (NAV) down from c.325p to 190p. Although the NAV has picked up to 212p this largely came from the 25 per cent stake in fellow London investor Shaftesbury (SHB), not its own estate. Rents are rising slowly and yields are unlikely to fall as benchmark interest rates rise so investors should not soon expect the NAV to show any material improvement. Shaftesbury might be a better option. 

Next 15 (NFC) – a global digital media agency with good growth credentials and organic growth above 25 per cent plus value to be extracted from a steady stream of acquisitions; especially the latest, Engine UK. Furthermore, a still largely federated group structure has made limited use of cross-selling and a drive to ‘productise’ its services should extend its reach. Upgrades are likely but not now as recent annual results already bumped up forecasts. On the downside, headline results are stated after heavy adjustments and the numbers could be more prudently struck especially on the treatment of acquired goodwill. There is potential and value here but the business is complex and opaque to all but industry experts so any buyer is taking something of a leap of faith. 

Intercontinental Hotels (IHG) – IHG is a top 5 global hotel operator and, in common with other industry leaders, owns few hotels itself instead running a largely fee-based franchise model. Travel is rebounding, especially in IHG’s key market of US domestic and Europe, Middle East, Asia and Africa remain barely profitable for now but should rebound. The war in Ukraine is likely to push recovery back, as is the latest surge in Covid so neither management nor analysts are likely to pencil in higher forecasts for a while. While the stock might look cheap against its main US-listed competitors, it has stuck around a PE ratio of 20x for much of the last 20 years and that suggests the share price is about right for now.