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Leisure in lockdown – a tale of two hotels

A closer look at two travel companies - Intercontinental Hotels Group and Whitbread.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Business and leisure travel tends to fluctuate with the fortunes of the economy, but the coronavirus crisis is particularly travel acute.

Lockdowns at home and abroad saw lots of players in the leisure sector shut for a significant chunk of the year. And just as things were starting to look up for the sector, boosted by summer staycations and the Eat Out to Help Out scheme, the UK government’s fresh lockdown restrictions look likely to hurt the recovery.

However, exactly what that means will be different for each company. Take InterContinental Hotels (IHG) and Premier Inn owner Whitbread as an example.

Same but different

On the face of it these seem similar businesses. Large hotel chains, forced to close over lockdown, and having survived, likely now face months if not years of subdued demand. However, under the hood, these two hotel groups are built pretty differently which means they’re likely looking at very different years ahead.

This article isn’t personal advice. If you’re not sure if an investment is right for you make sure you ask for advice. All investments fall as well as rise in value. You could get back less than you invest.

‘To own or not to own’

The key difference is that Whitbread owns and operates over 800 hotels whereas IHG owns just 26 in a portfolio of nearly 6,000. We generally prefer the latter approach but there are pros and cons to both.

Whitbread owns 60% of its hotel estate, which means rent payments are lower than if they leased the buildings. Greater control is another benefit, the group can take advantage of development opportunities as they arise. And with a balance sheet backed by property, the group can carry more debt, giving them greater flexibility to take advantage of acquisition opportunities.

Whether it’s the building itself or the staff within, Whitbread’s costs are largely fixed in nature. That means that once costs are covered, additional guests are almost pure profit. But as we’re seeing at the moment this phenomenon also works in reverse – Whitbread isn’t profitable with half empty hotels. And with demand expected to be subdued for a while, a lower and more flexible cost base is essential. Having furloughed 27,000 members of staff, the group has further announced up to 6,000 could be made redundant.

So if you don’t own the hotels, what’s the alternative?

IHG licences its brands, from Holiday Inn to Crowne Plaza, to the hotel owners in return for a percentage of their hotel revenues.

This means that IHG isn’t on the hook for many of the costs that Whitbread would be, like hotel upkeep and staff. You can see this difference from pre coronavirus operating margins, IHG’s franchise model of 54% vs Whitbread’s 20%.

However, that’s not to say IHG is immune. Its fee is a fixed percentage of room revenue, which means empty hotels are good news for no one. Revenue per available room (a product of how full hotels are and room prices) was down 52% at the half year, halving revenues to $485m and dropping profits by 83% to $70m. Notably IHG remained profitable, as franchise costs flexed. But there could be a longer term challenge. If IHG’s franchisees aren’t as financially strong and start going out of business, that’s an immediate hit to current and future earnings.

As things stand there’s no sign of this yet but it’s something to keep an eye on. Especially as offering additional help to wounded franchisees could be costly too.

Staycation or vacation

What and where are also key differentiators.

Whitbread’s portfolio is concentrated on mass market travel in the UK and more recently Germany. The latter is a key growth market for the group, with a hotel market a third larger than the UK but made up of many smaller players – fertile hunting ground for big hotel chains. However, while Whitbread will feel some benefit from travel restrictions boosting domestic tourism, so far it’s not been enough to offset the loss of international and business travellers.

Premier Inn - Current Hotels

Source: Whitbread Annual Report 2020

Premier Inn - Pipeline Rooms ('000)

Source: Whitbread Annual Report 2020

IHG - Current Rooms ('000)

Source: IHG Annual Report 2019

IHG - Pipeline Rooms ('000)

Source: IHG Annual Report 2019

IHG’s portfolio is much more diversified. Europe is only a small part of the story with the Americas and Greater China key regions. Greater China is a key focus of the pipeline, supported by structural growth opportunities – namely millions of increasingly wealthy citizens wanting to travel. And with mainland China exiting lockdown months ago, the good news is travel is back on the menu.

It looks slightly different to pre-crisis trends, travel is said to be entirely domestic and weighted heavily to mid and economy hotels. With Holiday Inn, IHG’s most common brand in the region, it should be well positioned for the recovery.

Considerations

An investment in either company or the sector in general at the moment depends on your take on the future of travel, both international and business.

The next few years are likely to be turbulent for both hoteliers. But if you’re tempted these two players offer exposure to quite different trends.

IHG presents a more cautious and diversified opportunity, with its large pool of brands giving investors breadth across geographies and the value spectrum.

Whitbread on the other hand aligns with those more positive on the outlook for travel and UK travel in particular.

See the latest Whitbread share price, charts and how to trade

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See the latest IHG share price, charts and how to trade

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The Chair of Hargreaves Lansdown is also a Non-Executive Director at Whitbread

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments and income they produce can rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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