Market Report: Intercontinental gains as Footsie drifts lower

Intercontinental Hotels raced ahead last night as investors piled in on the prospect of stronger demand for rooms as a recovery takes root.

Citigroup said hotel "lodging demand" was closely related to GDP growth and argued that the hotels industry, which has rebounded sharply off recent lows, was likely to climb even higher as economies around the world emerged from the slump.

Margins could bounce back by up to 60 per cent as revenue per available room, or "revpar", recovers. This would drived up earnings, which could double on a three- to five-year view. Moreover, there is the prospect of asset disposals as companies look to franchise or manage hotels instead of owning them. Intercontinental still has $1.85bn (£1.2 bn) of asset value that could be unlocked, according to the broker's estimates.

"Recovery in occupancy is usually a leading indicator for the industry," Citi said. "The year-on-year percentage decline in occupancy is already starting to moderate. July and August benefited from more buoyant leisure demand but recent anecdotal evidence suggests that business demand may also be recovering."

The assessment boosted Intercontinental's stock, which rose by 26.5p to 825.5p as it was moved from "hold" to "buy" by the broker. Whitbread, which was downgraded to "hold", went the other way, easing back 12p to 1210p after Citi argued that, that while the company had fared well through the downturn, others appeared better placed to exploit the recovery.

"Consensus forecasts have jumped 10 per cent on the back of the upbeat September trading statement. First-half results are due [on 13 October] but the company is unlikely to surprise again so soon," the broker said.

Overall, the FTSE 100, which rose by more than 2 per cent on Tuesday, paused for breath, relaxing to 5,108.9 – a fall of 29.08 points – while the FTSE 250 gained 25.12 points to close at 9,226.35. The benchmark was hit as parts of the mining and oil and gas sectors, which drove the market in the session before, fell back amid a round of profit-taking.

The oil explorer Tullow Oil declined by 39p to 1170p, and the platinum miner Lonmin fell by 44p to 1566p.

On the upside, the retail group Kingfisher saw its shares rise by 4p to 220p thanks to a round of upgrades, with UBS moving the stock from "neutral" to "buy" and Morgan Stanley revising its stance on the shares from "underweight" to "equal weight".

"To buy the shares here, one needs to believe management will deliver continued, industry-leading growth beyond its current three-year plan," Morgan Stanley said as it revised its target for the stock to 215p.

The tour operator TUI Travel was broadly unchanged, closing up 0.8p at 259.7p after Citi reiterated its "buy" view. It said that while on the surface the investment case for TUI appeared very similar to the one for Thomas Cook, the former looked "slightly cheaper in the short term", leaving more room for an "upside surprise".

The broker explained: "Thirty per cent of [earnings come] from niche and specialist businesses that offer better growth, lower risk and higher margins than the mainstream operation." Citi raised its target for TUI from 290p to 370p. Thomas Cook, which is rated "buy" with a 310p target at Citi, was 3.5p weaker at 234.3p.

Elsewhere, the drinks giant Diageo eased to 956.5p, a fall of 4.5p, after RBS analysts included the stock in a list of "potential acquirers to short". "We suspect Diageo has an informal agreement to buy the 66 per cent stake in Moët Hennessy from joint-venture partner LVMH," RBS said. "This transaction is likely to be contingent on LVMH finding a significant luxury goods acquisition, which is a distinct possibility in the current downturn."

Further afield, Mothercare rose by 31.5p to 641.5p thanks to HSBC, which began covering the stock with an "overweight" rating and a 700p target price. In a wide-ranging retail sector review, the broker also issued "overweight" ratings on Debenhams, which was 0.05p ahead at 77.65p, and Mike Ashley's Sports Direct International, which was 1.2p heavier at 105.8p.

However, the video games retailer Game, also rated "overweight" by HSBC, was unsettled, and eased back by 1.1p to 159.5p despite some words of support from the broker.

HSBC said of Game: "We expect console price cuts to have a netural effect on the industry profit and loss, with volume sales growth offsetting the reduction in price.

"The increased installed console base should then result in increased demand for higher margin software, and overall industry sales could benefit from the increased sales volume."

HSBC also weighed in on Dignity, the funeral services provider, which ended the day 9.5p higher at 590.5p after the broker raised its target from 665p to 690p.

"Given the quality and security of underlying cashflows, Dignity is ideally suited to the use of securitisation in maximising shareholder returns," the broker said. It added that it expected the group to return a further £100m to shareholders, subject to bond market conditions, by re-leveraging its balance sheet from 2010 onwards.