UPDATE 3-Spain's Sol Melia cuts capex, gloomy on 2009

Tue Nov 11, 2008 2:38pm EST

Related Topics

* Cuts expansion spending for next year

* Sol Melia sees continued fall in revenue per room

* Nine-month net profit falls 42 pct to 80 mln euros

* Currently has sufficient liquidity until end of 2010

* Shares up 1.1 pct at 3.85 euros vs negative market (Adds quotes)

By Ben Harding and Robert Hetz

MADRID, Nov 11 (Reuters) - Sol Melia has cut back its 1.1 billion euro, three-year investment plan in the face of an economic downturn, a director at the hotel chain said on Tuesday after reporting results savaged by falling tourist spending.

The world's 13th biggest hotel chain had planned to spend half the 2008-2010 investment budget on expanding its chain of more than 300 hotels.

However, a director who asked not to be named said the Mallorca-based company's priority was to maintain financial health in the face of a downturn that slashed nine-month profit by 42 percent to 80 million euros on Tuesday.

"For now, the expansion plan or major refurbishment of hotels is halted for next year," the director told Reuters by telephone, adding that it would only spend 100 million euros on maintenance and projects with an immediate return this year.

"If the situation does not change, we will limit ourselves (in 2010) to necessary maintenance investment and little else."

He said the 1.1 billion euros investment target, outlined as conditions were souring in February, would not be met -- a move welcomed by William Birch at brokers Jefferies in London.

"This is entirely a logical response. We always thought they were going to struggle when they launched the plan. In the last downturn it got into real trouble overreaching itself, and I guess they are determined not to make the same mistake."

This year Sol is on course to spend less than 200 million euros, compared with its original 300 million estimate.

Sol said revenue per available room, a measure of underlying performance, fell 2.1 percent in the nine month period. In September alone RevPar at European city hotels tumbled 5.8 percent, and the director said he saw little sign of that changing.

"It's likely that RevPar will continue to fall in 2009."

He added, however, that Sol has a healthy cash position.

After signing a 200 million euro loan around 10 days ago to pay bond holders on an existing loan, it had 635 million euros of cash in the bank, versus debt obligations of 578 million up to the end of 2010.

BALEARICS BEACHED

Tuesday's results, which included the key summer season, showed how Sol Melia had been hurt by the downturn in the Spanish economy and the damage done by the pound's 14 percent weakening against the euro, which made holidays in Spain more expensive to Britons.

The combined effect was to dent RevPar by 9.2 percent on Spain's Balearic Islands, where the Escarrer family founded Sol 52 years ago. They own 64 percent of the company after raising their stake 2 percent this year.

A slowdown in business travel has continued into the fourth quarter, the company said, while a slowdown in U.S. and Mexican demand would hit its Latin American business.

"The difficulties faced in 2009 to a large or small extent are going to be present in the majority of our destinations," the Sol Melia director said, adding that coastal hotels should perform better than city hotels.

"The leisure spending at the weekends is going to be hit, but we think beach and sun destinations, both in Spain and the Caribbean, will do a little bit better than city hotels which are much more influenced by business trips."

Latin American revenue around 20 percent of the total, should be helped by a strengthening of the dollar in the first half of next year, Sol Melia said.

Core earnings (EBITDA) fell 18.6 percent to 220.8 million euros, in line with analysts' forecast, on a 3 percent decline in revenue to 992 million euros.

The bottom line was also dented by comparison with last year, as paralysis in the Spanish property meant there was nothing to match the previous period's 23 million euros in disposal gains.

"I can't see much of a silver lining in what they released, but I think it was largely expected. Sol is the most resort-based of the European groups; we knew they were going to struggle," he said.

Sol shares, which have fallen 40 percent in the last three months, had climbed 1.1 percent to 3.85 euros by 1456 GMT compared with a 3.2 percent fall in Spain's Ibex index .IBEX. (Reporting by Ben Harding, editing by Will Waterman, Bernard Orr)

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