Today’s update from easyHotel (LSE: EZH) shows that the super budget hotel chain is making encouraging progress. In fact, trading for the six months to 31 March was slightly above the board’s expectations and this was mainly driven by the like-for-like (LFL) revenue from owned hotels rising by 8% versus the same period last year.
A key reason for such strong growth is the company’s new revenue strategy, announced in December 2015, which enabled easyHotels’ owned hotels to outperform their competitive set, particularly in the second quarter of the financial year. And with franchise hotel trading and costs being in-line with the board’s expectations during the period, the performance of the company as a whole has been relatively impressive.
Looking ahead, easyHotel is forecast to increase its bottom line by 21% in the current year and by a further 7% next year. Both of these figures indicate that the super budget hotel space could be a profitable sector for investors. And with demand for hotels being high, the long term prospects for the easyHotel business seem to be bright.
Of course, easyHotel is currently not a particularly attractive income play. That’s because it yields just 0.4% from a dividend which is covered 2.9 times by profit. Clearly, there is scope for the payout ratio to rise, but with easyHotel being a relatively young growth company, it seems likely (and sensible) for capital to be reinvested in the business rather than paid out to investors. As such, and while easyHotel could be worth buying for less risk averse investors, its income appeal over the medium term seems to be limited.
Room for growth
Therefore, buying easyJet (LSE: EZJ) right now appears to be a more prudent move for income-seekers. That’s because the budget airline yields 4.1% from a dividend which is covered 2.5 times by profit. This indicates that there is considerable room for growth in shareholder payouts, with dividend growth of 18.6% forecast for next year providing evidence of this.
Furthermore, with easyJet expected to increase its bottom line by 6% this year and by a further 15% next year, it remains a fast-growing company. On this front, it has been aided by greater sales from business customers as well as initiatives such as allocated seating, which have helped to boost revenues in recent years. And with easyJet trading on a price to earnings (P/E) ratio of just 9.9, there appears to be significant potential for an upward re-rating over the medium to long term.
Certainly, easyJet’s passenger statistics have been hurt recently by air traffic control strikes in France which have caused flights to be cancelled. While there is scope for further challenges, easyJet’s valuation shows that it has a sufficiently wide margin of safety to merit purchase at the present time. And while easyHotel could one day become a top notch income play, easyJet seems to fall into that category today and could prove to be a superb long term buy.
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Peter Stephens owns shares of easyJet. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.