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Intercontinental Hotels Group - Revenue falls short

Nicholas Hyett | 8 August 2017 | A A A
Intercontinental Hotels Group - Revenue falls short

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Underlying first half operating profits rose 7% to $365m. The interim dividend rises 10% to 33 cents per share.

However, the shares fell 5% in early trading after revenue growth fell behind market expectations, rising just 4% to $788m.

Our View

InterContinental Hotels Group (IHG) is now a 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 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 its global, online bookings system. In both cases, IHG collects revenues from the hotels, in one form or another, without tying up capital in actually owning the properties.

The transition away from owning hotels is largely complete, with the group holding just $422m of property assets. From here on the focus will be on attracting new owners to the brands, and the cash generation potential of the managed and franchised businesses. Together, these are the foundations on which the group's ambition of a growing ordinary dividend are built.

Revenue per available room (RevPAR) has slowed of late, largely as a result of poor performance in oil heavy regions to which IHG is heavily exposed, as well as a fall in spending by wealthy Chinese in Hong Kong and Macau. However, the group also seems to be struggling in the US, and that is more of a concern, since the Americas account for 87% of group operating profits.

Current trading aside, IHG has a significant pipeline of new hotel rooms which should support revenue growth even if RevPAR does slow. The roll-out of new rooms is stepping up in China, and the existing US footprint should give IHG a strong presence in two attractive markets.

Despite near term headwinds, we feel that the group's potential to generate cash through its capital-light approach should provide some reassurance that the company can maintain its strong track record on the dividend. IHG has either raised or maintained the ordinary dividend every year since 2004, and analysts are currently forecasting a prospective yield of around 1.9%.

First Half Results

Revenue growth in the first half was driven by a 2.1% increase in revenue per available room (RevPAR) and a 3.7% increase in the number of rooms. RevPAR growth was slower in the second quarter, at 1.5%, with a 0.4% decline in the US - which was adversely impacted by the timing of Easter.

The group added a net 10,540 rooms compared in the half, almost all in the managed business and with particular growth in Holiday Inn Express, which added 45 hotels. This takes global rooms to 778,000, across 5,221 hotels.

The pipeline currently stands at 230,000 hotel rooms, across 1,513 hotels. Of these rooms, around 45% are under construction. New signings to the pipeline include over 150 planned boutique hotels under the Hotel Indigo brand, including Beijing and Leicester Square. The group has also begun the development of a new, midscale brand to address a $20 billion underserved segment in the US.

IHG saw a 2.4 percentage point improvement in margins in the quarter, with group fee margin now at 51%. However, since this partially reflects favourable cost phasing, the group expects a full year improvement of just 1.35 percentage points.

Net debt has increased to $2.1bn, and now stands at 2.5 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments 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 for more information.