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IHG: 'Continued momentum drives strong third quarter performance'

Charles Huggins | 20 October 2015 | A A A
IHG: 'Continued momentum drives strong third quarter performance'

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InterContinental Hotels Group (IHG), owner of the Holiday Inn, Intercontinental and Crowne Plaza brands, has reported third quarter results. Revenue per available room (RevPAR) grew by 4.8% in Q3, which was broadly in line with the first half outcome (+5.1%). Holiday Inn delivered a record level of room openings in the quarter, driving a 4.3% year on year rise in net system size to 727k rooms (4,963 hotels). The room pipeline remains strong with 16k rooms signed in the third quarter (the highest since 2008), including 5k in China. The shares rose by over 2% in early morning trading.

Performance by geography (constant currency):

In the Americas (around half of sales) RevPAR was up 4.3% in Q3 and 5.1% in the first 9 months, with a strong performance from the US and Mexico more than offsetting weakness in Canada.

In Greater China RevPAR was down 0.7% in Q3, and up 0.7% in the first 9 months. Mainland China grew RevPAR by 2.1%, but this was offset by double digit declines in Hong Kong and Macau.

Europe saw another strong performance from the UK and Germany. RevPAR was up 7.8% in the third quarter and 6.1% in the first 9 months.

In the Asia, Middle East and Africa region (AMEA) RevPAR rose by 7.1% in Q3 and 6.1% in the first 9 months, led by another strong performance from Japan.

Capital allocation:

IHG completed the sale of InterContinental Hong Kong, for proceeds of $929m in the quarter. This follows the disposal of InterContinental Paris - Le Grand for EUR330m earlier in the year and marks the completion of IHG's asset disposal programme. A decision on return of funds to shareholders from asset sales will be disclosed at preliminary results in February 2016.

Richard Solomons, Chief Executive, commented:

"There is increasing momentum across our portfolio of preferred brands... Looking ahead to the remainder of this year, we are encouraged by current trading trends and remain confident in the outlook."

Our view:

Intercontinental Hotels Group has now sold the last of its major owned hotels, to become an almost pure-play hotel management and franchising company, operating brands ranging from Intercontinental at the top end of the market to Holiday Inn Express in the budget hotel sector. Over 700,000 hotel rooms around the world operate under IHG brands.

In managed hotels, IHG runs the show, on behalf of landlords who own the properties. For franchises, IHG is essentially licencing a brand to the hotel owner, and directing reservations to the property from their global website bookings system. In both cases, IHG is collecting revenues from the hotels, in one form or another, without tying up capital by actually owning the properties.

Over the last decade or so, IHG has raised around $8bn from selling hotels that it owned, in order to act as manager instead. These funds have been returned to investors, with over a billion dollars of recent receipts awaiting distribution or reinvestment currently. With cash like this in their pockets, IHG are currently being linked to every conceivable deal in the sector and the group recently had to deny they were in talks with Starwood, a US operator around half their size.

Uncertainty over a potential Chinese slowdown could keep the stock price moving around a bit more than usual, given that IHG has a big pipeline of new hotels set to come to market across China. But over the longer term, IHG's exposure to the US and China leaves it well positioned, in our view. The shares currently trade on around 19x forward earnings, which is around a 15% discount to their longer run average valuation.

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 for more information.