Picking Up Assets On The Cheap

The mood gets better and better. The AIM All Share Index is up another 3% and the FTSE Small Caps have risen 2.5% this morning. Meanwhile, our “Leinster Profit Secret” play is up another 9% since I wrote yesterday. I think it’s got a lot further to go – and you can still get in now.

It’s too early to say whether everything is now fixed in the markets. Of course it is. But there is certainly a change in sentiment – and that can only be a good thing for penny share investors.

I’m a firm believer that the market has been sold off so aggressively, that there is now real value in some shares. Fortunes will be made in the years ahead by picking up the right small cap companies when they are cheap. When the downturn ends for real, these stocks could soar.

There’s one I want to talk to you about today. It’s not one I’m buying yet. But it’s certainly one that’s on my watch list. Let me tell you a little about it…

The only time I went to Sendai, a coastal town to the north of Tokyo, I bathed naked with people of both sexes and shared my bedroom with three others.

But don’t worry. Nothing untoward happened. You see, that was in 1989, when prices in Japan were so high that you needed a bank loan just to buy a plate of rice. So, the four of us slept on futons, arranged like sardines in a small hotel room. And as for the naked bathing, well that is what people go to Sendai for. It is a spa town and no trip is complete without plunging into the hot springs, averting ones eyes delicately from other bathers.

Here’s a share that’s out-performed AIM by 92% since January!

I was reminded of this the other day when speaking to Stephen Mansfield, a former banker in Tokyo, who now manages a portfolio of Japanese hotels, including one in Sendai, on behalf of AIM-quoted Japan Leisure Hotels (‘JPLH’).

JPLH has been quoted on AIM since January, when it raised £2m at a price of 50p. Given what has happened in world markets since then, it has clearly done well to see its share price today at 47p. That’s a 6% fall compared to a 50.8% crash in the index. So you could say that the share has outperformed the market by a staggering 92%. So what’s the secret?

Mansfield’s strategy is quite straightforward. He describes the Japanese hotel business as ‘a cottage industry.’ There are about twenty five thousand hotels in Japan, but with over 90% of operators owning five hotels or fewer, there are very few recognised chains. This presents the opportunity to build a brand and the names of JPLH’s hotels start with the word Bonita, which means a ‘small, beautiful thing.’ And to match the product with image, JPLH has renovated its acquired hotel rooms, replacing a tired drab look with something more sophisticated.

Picking up portfolio assets on the cheap

Times have changed since that visit of mine to Japan 19 years ago. Back then, the industry was booming and prices were sky high. Inevitably there was an over-expansion of the hotel industry but now, after years of economic stagnation, the business is a struggle and many owners are in serious financial distress. Just two months ago Urban Corporation and Sebon, two medium-sized Japanese real estate companies and owners of leisure hotel portfolios, went bankrupt. Other owners are facing succession issues or struggling to raise investment capital. So with plenty of hotels for sale, JPLH has been able to assemble its portfolio at below replacement cost… on the cheap.

Six weeks ago it completed the acquisition of its sixth hotel, in Yokkaichi. Bought for about £2m, this forty-seven room property in central Japan made a profit of £169,000 last year. What’s even better is that by applying lessons learnt at its other hotels, JPLH expects to boost this figure.

One of these lessons is the need for flexible booking times. The Japanese hotel industry does not work in quite the same way as that of the UK. Guests do not stay for days at a time, and expect to check out at 10.00 in the morning. In Japan it is common to book hotel rooms for a matter of hours. And when I tell you that the guests are typically in the 20-35 year old age bracket and that the most popular check-in time is 9.00-11.00 pm on a Saturday evening, I think you can guess the rest.

Occupancy rates are as high as 250%, implying not that there are more than two people in the room at a time but that the rooms are let more than once in a day. Guests are not on business or on holiday, most of them live in the vicinity of the hotel but know of no other place where they will be undisturbed. Rooms can be booked on-line or via a mobile phone, and the average spend per couple is just £34.

Times are hard… but expansion could lead to rich rewards

But the credit crunch is hitting Japan, too, and leisure spending is under pressure. The implications for JPLH, which has in addition had to cope with rising food and electricity prices, are mixed. It has referred to a competitive environment, but still this is one that is presenting Mansfield with the perfect opportunity to expand the chain.

There are now an ‘unprecedented’ number of hotels for sale in Japan and having splashed out £2m of JPLH’s £2.9m cash pile on the Yokkaichi hotel, Mansfield is now ready to borrow money for the first time if he can do so on the right terms.

I am not planning to go to Japan any time soon. And if I do I don’t suppose I will be checking in for a few hours on a Saturday night. But I will be checking in on the progress of Japan Leisure Hotels. This is an interesting story, and if Mansfield can expand the group successfully through the downturn, then he could reap a rich reward when the economy picks up.

That’s all for today – I’ll be back on Thursday. In the meantime, if you’ve not yet had a chance to read about the outstanding "Leinster Profit Secret" opportunity I mentioned above, you can do so here. This recent market sell-off has made this share ridiculously cheap. If markets do continue to recover, and the credit markets start flowing, I expect this one to really fly.

Regards,

Tom Bulford
for The Penny Sleuth

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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