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InterContinental Hotels - Still growing revenue sand rooms

Nicholas Hyett | 19 October 2018 | A A A
InterContinental Hotels - Still growing revenue sand rooms

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IHG saw total third quarter revenue per available room (RevPAR) rise 1%, at constant exchange rates, with revenues year to date up 2.7%. Total rooms rose 5.1% to 825,746.

The shares fell 1.5% in early trading.

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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 budget Holiday Inn Express.

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.

The group has established positions in the US and European markets but isn't resting up. IHG is rolling out new brands and services, while stepping up the pace of expansion into Asia.

The group's hopeful it can strengthen the bond between itself and its partners with integrated booking systems and hotel management software. It's also confident of netting around $125m per annum of efficiency improvements by 2020.

The combination of increasing room numbers, a closer relationship with partners and cost savings would be a heady mix - if IHG can pull it off.

So far, progress has been good. Trade relations between the US and China might be turning sour, but with momentum in both countries building, the two global superpowers are proving a winning formula for IHG.

We think both regions are attractive markets long-term, however investors shouldn't forget the short-term fortunes of hotel companies rise and fall with the wider economy. That means there's always the possibility of a nasty wakeup call if either economy has a wobble.

The transition to a more asset-light business model is now complete, so the huge special dividends that were paid out after asset sales are likely behind us. However, if IHG can attract new partners, the cash generation potential of the managed and franchised businesses should help it maintain a record of ordinary dividend growth that stretches back to 2004, although of course there are no guarantees. An extra $500m is now due to be returned through special dividends early next year.

While we think the IHG business model is attractive, with the shares trading on 17.8 times expected earnings, an 18% premium to their longer term average, we clearly aren't the only ones. The recent strong run has pushed the prospective yield to 2.4%.

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Third quarter trading update:

19,000 rooms opened in the quarter, the strongest Q3 performance in 10 years. This includes 2,000 rooms associated with the acquisition of Regent hotels, and 1,700 rooms in the UK the previously operated under the Principal and De Vere brands.

The group signed 27,000 rooms into the pipeline during the quarter, the highest level of signings since 2008. The pipeline now stands at 267,000 rooms.

In the Americas, RevPAR was flat in the third quarter, largely thanks to a slight negative performance in the US as increased prices failed to offset lower occupancy. Canada, Colombia, Brazil and Mexico all delivered stronger results.

Europe, Middle East, Asia & Africa saw RevPAR rise 2.5% in Q3, with an especially strong result in France. The bonus of the World Cup led to double digit growth in Russia.

Greater China RevPAR rose 4.8% in Q3, with Hong Kong up 5.2%, Mainland China up 4.5% and Macau up 3.8%. The Chinese network rose 17% year-on-year.

The group continue to target around $125m in annual savings by 2020.

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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.