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InterContinental Hotels Group - $1.5bn special dividend

Steve Clayton | 23 February 2016 | A A A
InterContinental Hotels Group - $1.5bn special dividend

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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IHG shares have opened almost 4% higher after announcing full year underlying profit growth of 11% and underlying earnings per share growth of 19%. Following the completion of their major asset disposal programme a $1.5bn special dividend is announced, along with a 10% increase in the full year ordinary dividend to US$85c. The special dividend is worth US$632.9c per share and will be accompanied by a share consolidation.

The group grew underlying revenues by 8% and Revenue per Available Room (RevPAR) by 4.4% on a like-for-like (LFL) basis, with growth in all regions. Net room numbers grew by 3.2%, or 4.8% after the $430m acquisition of the Kimpton boutique hotels group. Gross revenues by hotels within IHG's brand networks were $24.0bn, up 5% and by 11% at constant currencies.

Following the disposal of the last major owned hotels, the group is focused on managed and franchised hotel brands, and >95% of profits are now from the fee business. Margins in the fee business were 46.3% and the group sees consistent fee margin progression ahead. The reduction in owned assets via the disposal programme, to focus on asset-lite management and franchise operations has seen return on capital employed rise to 57%, from 9% at the start of the process in 2004.

During the year, IHG opened their 5000th hotel, in New York's Lower East Side. 78k rooms were signed into the pipeline, a 13% increase, led by the Americas. Of the 214k rooms in the pipeline, 45% are under construction and 90% are in IHG's ten priority markets. The pipeline represents 15% of industry pipeline, more than 3x IHG's current share of the industry supply of existing rooms.

RevPAR rose by circa 5% in the Americas, Europe and the Asia, Middle East & Africa regions. In Greater China RevPAR rose by 0.3%, with mainland China ahead, offset by declines in Hong Kong and Macau. Total underlying revenues rose strongly in Greater China, reflecting the addition of 20k rooms into the network.

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 the proposed $1.5bn special dividend set to take the total toward $10bn. The market had viewed IHG as a potential predator, given the cash in its pockets; paying this back to investors should see the focus return to IHG's organic potential, which looks strong.

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.