A profit warning by luxury Barbados hotel operator Elegant Hotels (EHG:AIM) sends shares in the £87 million cap plummeting 9.7% to 88.5p.

The Zika virus has resulted in room cancellations and significant competitor discounting, while political uncertainty in the run-up to the EU Referendum is being blamed for a reduction in demand for luxury holidays.

Like-for-like sales in the year to 30 September are expected be slightly lower than last year and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will be between $20 million and $21 million, down from $22.2 million in 2015.

EHG - Comparison Line Chart (Rebased to first)

Barbados has reported a few Zika cases which meant Elegant suffered a slowdown in bookings when negative PR hit the UK in February.

'After that the slowdown wasn't related to Zika, but around uncertainties related to the UK market. These uncertainties affected currency, making holidays more expensive,' says Elegant Hotels' chief executive Sunil Chatrani.

He says Elegant's yield management system can work against it in times of heavy discounting. 'Smaller operators do panic pricing, which we know doesn't make sense.'

Elegant hopes the negative effect of Brexit and Zika will be relatively short-term. A potentially longer-term concern is that market competition has increased, with a rise in the number of lower-cost accommodation options.

Chatrani says this is mainly a problem in the US, where low-cost airlines have added new routes to Barbados. 'We're seeing more people coming back to Barbados to visit family and friends and they're choosing the cheaper options. We're responding by doing more consumer branding in the US,' he adds.

House broker Zeus Capital says it’s difficult to judge the extent to which the factors are short-term in nature. It has cut its earnings per share forecast for 2016 by 11% to 9.4p - a drop of 8.7% from 2015.

Despite the gloomy outlook, Elegant remains committed to a full-year dividend of 7p, giving it an eye-catching 7.9% yield.

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Issue Date: 14 Jun 2016