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Intercontinental Hotels Group - Systematic growth

Steve Clayton | 6 May 2016 | A A A
Intercontinental Hotels Group - Systematic growth

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IHG has reported Q1 Revenue Per Available Room (RevPAR) growth of 1.5% along with the opening of 5k new rooms, taking the global system to 742k, up 2.7% year on year. A further 15k rooms were added to the pipeline, which now stands at 220k, of which 45% are already under construction.

The shares dipped 1.5% on the news.

IHG signed rooms into the pipeline at its fastest Q1 pace in eight years. The company believes its pipeline represents around 13% of the industry's planned new room stock, which is roughly three times its existing market share. In future, IHG's Rewards programme will give better rates to members who book direct, which IHG hope will strengthen their loyalty offer.

Around the world, RevPAR growth was strongest in China, but with a notable split: on the mainland, growth was 6.2%, but RevPAR in HK and Macau was down double digits. In the USA, 1.9% overall RevPAR growth was made up of 3% growth outside of oil-driven markets, where RevPar dropped 10%. London saw soft trading due to supply coming to market, whilst the provinces were strong. Parisian demand was weak, following the terror attacks.

Holiday Inn added 10k new rooms to its pipeline, and five new Intercontinental Hotels and Resorts were signed. Hotel Indigo added record numbers of rooms and Kimpton added its first hotel outside of the USA, in Amsterdam. The 5k new rooms opened were offset by 8k which left the system. IHG expects the pace of departures to normalise in the remainder of the year.

Describing the quarter as a good start, CEO Richard Solomons said that despite electoral uncertainties in the US, and the ongoing drag on demand caused by weak energy prices in oil producing regions, current trading and the momentum behind IHG's brands gave the Group confidence for the rest of the year.

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.

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. The $1.5bn special dividend to be paid May 23 will take the total returned to shareholders since IHG was demerged from the old Bass brewing business in 2003 to $12.1bn. Putting that into context, in 2003, IHG's market value was just under $7bn, and today it is $9.7bn, having gone ex the special dividend.

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 21x FY16 earnings, close 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.