Canaccord cuts Safestay to 'hold' from 'buy'

Canaccord Genuity has cut its rating on Safestay to ‘hold’ from ‘buy’ and lowered the target price to 42p from 65p after the budget accommodation provider said 2016 was a “difficult year”.

In a pre-close trading statement, Safestay said its performance in 2016 was affected by political instability, low visitor numbers in London and terror attacks in France, but the hostel owner and operator remains confident about its outlook this year.

"This exacerbated the slow build-up in average bed rate (ABR) and occupancy in Holland Park which impacted the Group's trading performance and while substantially ahead of last year it is slightly below market expectations for 2016," it said.

The group said while it is “substantially ahead of last year it is slightly below market expectations for 2016”.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the year is expected to be £2.2m, up from £600,000 the previous year and revenue is to be £7.4m, up from £4m.

Canaccord, which had expected EBITDA of £2.5m, said trading at Holland Park hotel has not matured as hoped in a tougher-than-expected market. The broker cut its forecasts for fiscal year 2016 to a loss per share of 0.66p from a LPS of 0.05p. For 2017, it lowered its estimate to earnings per share of 0.74p from EPS of 0.86p.

“Holland Park opened in summer 2015 with a soft launch and it has taken longer than expected to build the group business due to softer trading conditions post the Paris terrorist atrocity,” Canaccord said.

“As a consequence, Safestay has turned to lower-yield transient business to keep the hostel busy. Safestay completed a minor rooms configuration in autumn 2016 and advance bookings are considerably better than last year. Elsewhere trading continues to be satisfactory.”

Safestay is making “good progress” with the extension of its Elephant and Castle hostel in London which is expected to be complete in time for summer 2017.

The project will add 80 rooms and will improve the food and beverage offering.

“The planned rooms will be smaller which should command a higher premium,” Canaccord said. “We calculate the development should generate another £500k of room revenue and £75k of ancillary revenue using existing assumptions for fiscal year 2018 with an 85% room revenue conversion to EBIT.”

Shares gained 5.65% to 44.90p at 1135 GMT on Tuesday.