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IHG - A dividend hiatus for strategic review

George Salmon | 20 February 2018 | A A A
IHG - A dividend hiatus for strategic review

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InterContinental Hotels Group's full year results confirmed continued growth in revenues, profits and dividends.

An increased final dividend of $0.71 per share takes the full year dividend to $1.04, up 11%. However, due to costs associated with implementing a strategic review of the business the group says it will not be paying any further capital returns in 2018.

The shares fell 3.3% on the news.

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Our View

InterContinental Hotels Group (IHG) is now a pure-play hotel management and franchising company, operating brands ranging from the luxury InterContinental to Holiday Inn Express in the budget sector.

In managed hotels, IHG runs the show on behalf of landlords. For franchises, IHG licences a brand to the hotel owner and directs reservations to the property from its global online bookings system. In both cases, IHG collects revenues from the hotels without tying up money actually owning the properties.

A strategy review accompanying full year results confirmed the group will take a break from the special dividends that have boosted recent returns. This is because it's investing $200m in a wide-ranging plan that'll see it offer more services to existing franchise partners, from digital check-in services to hotel management software.

The changes will hopefully have two benefits. IHG is hopeful of delivering $125m of annual savings by 2020, while the investment in its services and loyalty programme could also help deliver higher quality recurring revenues for both IHG and its franchisees.

The combination of increasing room numbers, more revenue per room and stickier customers from would be a heady mix - if IHG can pull it off.

Geographically, the group has a high exposure to the US, which should be an attractive market long-term. China is the other location likely to move the dial, given the scale of its expansion. Provided the Chinese economy behaves, there should be tailwinds behind this roll-out.

With the transition to a more asset-light business model now complete, the days of huge special dividends are likely behind us. However if IHG can attract new hotels to its brands, the cash generation potential of the managed and franchised businesses will help it continue a track record of dividend increases that stretches back to 2004.

While we think the new business model is attractive, with the shares trading on 22.8 times expected earnings, a 32% premium to their recent average, we clearly aren't the only ones. The recent strong run has pushed the prospective yield a shade below 2%.

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2017 results

Reported revenue increased 4% to $1.8bn, primarily resulting from a 4% increase in room numbers, to 798,000, and 2.7% growth in comparable revenue per available room (RevPAR).

Revenue and profit growth was delivered across IHG's regions, with Q4 RevPAR growth of 4% ensuring it finished the year strongly.

Group fee margin of 50.4% rose 1.6 percentage points, boosted by cost efficiencies. This helped underlying operating profit rise 7% to $759m.

Over the year IHG added 83,000 rooms to its pipeline, representing its highest growth for nine years. This included 37,000 additions in the Americas, with the remaining 46,000 split evenly between the Greater China and soon to be combined EMEAA (Europe, Middle East, Asia and Africa) regions.

Expansion saw net capital expenditure rise by $42m to $227m. With free cash flow stable at $516m, net debt rose by $345m to $1.9bn at year end, leaving the group on a net debt to EBITDA ratio of 2.1.

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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.