Jurys Doyle secure in strong markets

The strong performance of the Irish equity market over the past year has reflected across-the-board strength in mostquoted companies. However, the really stellar returns have come from the small and mid-capitalisation stocks. Companies such as Grafton Group, Unidare, Kingspan and Anglo Irish Bank have outperformed the ISEQ index by very large margins.

As a result, valuations as measured by price earnings ratios (PER) and dividend yields have become quite demanding for many of these companies. One mid-cap company that has performed reasonably well, but not to the same extent as these high flyers, is Jurys Doyle Group. Over the past six months the share price has risen by a creditable 24 per cent.

However, the overall Irish market rose by just under 20 per cent over the same period so that Jurys outperformed the market by a modest four percentage points.

In recent years, Jurys has successfully expanded into the UK and US. Its expansion into the UK has been particularly significant and its hotels there now generate as much revenue as its Irish properties. The UK and the Republic each account for approximately 45 per cent of revenues, with the US accounting for 10 per cent.

While the group does benefit from this geographical diversification, it also benefits from the type of expansion strategy pursued. The group has successfully developed its Jurys Inn brand, which is aimed at the three-star "Budget Plus" segment of the market.

This is the fastest growing market segment in the UK and it has proved to be virtually recession proof. In the post 9/11 period, the budget sector continued to grow even though the overall demand for hotel accommodation was in decline.

By the end of 2005, the group will have 13 properties in the UK, which gives it a strong market presence but with plenty of room for expansion over the medium term. The company's home market in the Republic is still very important, where Jurys has approximately 2,700 bedrooms. Lacklustre growth and upward pressure on costs has been a feature of the Irish market in recent years and this has created difficult market conditions for Jurys four-star properties.

Furthermore, Dublin has seen the building of several hotels, which has heightened competition. Another concern is that there are signs that the Republic has become less competitive as a tourist/conference destination. Jurys is responding to the changing Irish market through a strategy of selling its smaller and under-performing properties.

Given the strength of the property market, conditions are very favourable for executing this strategy. Funds released from such sales are being redeployed into more attractive opportunities such as the Croke Park hotel development and the redevelopment of the company's Cork hotel. Despite the tough competitive climate, Jurys leading position in the fast-growing Irish economy is a very attractive feature of the firm from an investment perspective.

The UK hotel market has recovered quite well from the weakness experienced in 2002/2003. A recently released survey of its hotel sector from Deloitte & Touche showed that revenue per available room (revpar) increased by 7 per cent in 2004. Revpar for 2005 is expected to rise 4 per cent, with growth in room rates being the main driver. This augurs well for the current and prospective performance of Jurys UK hotels.

After modest growth in earnings per share (EPS) in 2004, brokers are forecasting growth of 10 per cent in EPS in 2005. After its recent strong run, the shares are a little expensive on the basis of a prospective PER of 19 compared with the market average of 13.

However, hotel shares usually trade at higher than average PER, reflecting their strong asset backing. The prolonged strength of the Irish property market means that Jurys asset backing is particularly strong.

Investor takes the view that Jurys Doyle Hotel Group still offers investors good medium-term upside. The group has established a profitable position in the UK market where there is ample scope to expand over time.

The group's leading position in the Irish market provides it with the capacity to respond to the changing market environment. The strong Irish property market provides the group with an ideal opportunity to sell marginal properties and to redevelop and enhance its flagship hotels.

The group's balance sheet is healthy and it is generating strong cashflows.

For all these reasons, Investor believes that the shares are attractive when compared with other mid-cap quoted Irish stocks.