Dalata slip could be a buying opportunity

Dalata Hotel Group (DAL) shares were marked down by 6 per cent on results day after the leading Irish hotel operator said a key profitability metric had been hit at the start of this year by a surge in available hotel rooms in Dublin and revealed lower annual statutory profits, despite revenue growth of almost a fifth. 

Revenue per available room (revpar) was down 11 per cent in the Irish capital in January and February after 1,800 new rooms hit the market, and there were fewer events in Dublin to draw in leisure spend. Overall revpar fell 4 per cent in the two months. 

The performance over 2023 was more positive, despite higher costs dragging down profits, with revpar rising 12 per cent as the average room rate grew 6 per cent to €143 (£122) and occupancy climbed from 76 per cent to 80 per cent. The hotel Ebitdar (earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) margin returned to 2019 levels despite inflationary pressures. 

Cash flow generation – free cash flow was up 5 per cent to €133mn in the year – backed up by a €1.7bn freehold estate means the group is well-placed to expand. Three new hotels were added to the portfolio in the year, in London and Amsterdam, while the current pipeline contains more than 1,500 rooms. 

A leverage ratio of 1.3 times net debt to Ebitda after rent is manageable. Balance sheet strength was seen in the dividend level. 

The shares are valued at only 11 times forward consensus earnings, well below the five-year average of 26 times. This looks enticing in the context of the group's estate and growth plans, and with a free cash flow yield of 11 per cent, we make a move. Buy. 

Last IC view: Hold, 299p, 31 Aug 2022