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InterContinental Hotels Group - decade-high system growth

George Salmon | 19 February 2019 | A A A
InterContinental Hotels Group - decade-high system growth

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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.

InterContinental Hotels Group 20 340/399p

Sell: 5,052.00 | Buy: 5,056.00 | Change -44.00 (-0.86%)
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Boosted by the addition of 56,000 new rooms, higher rates and improved occupancy in all areas, InterContinental Hotels Group (IHG) has delivered higher half year revenues and profits. The interim dividend rose 10% to $1.144 a share.

The shares were little moved on the news.

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Our view

IHG is 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's got established positions in the US and European markets but isn't resting up. It's rolling out new brands and services, while stepping up the pace of expansion into Asia and China in particular.

The group's hopeful it can strengthen the bond between itself and its franchisees 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, but ongoing trade wars, stuttering Chinese growth figures and the innate unpredictability of Donald Trump mean there are a few looming doubts over the group's two most important geographies. The capital-light model means IHG's less exposed to the ups and downs of the cycle than it used to be, but there's always the possibility of a nasty wakeup call if either economy has a major wobble.

However, we think exposure to both markets should be beneficial in the long-run. 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.

While we think the IHG business model is attractive, with the shares trading on 17.6 times expected earnings, a 20% premium to their longer term average, we clearly aren't the only ones. The recent strong run has pushed the prospective yield down to 2.3%.

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Trading details (at constant exchange rates unless stated otherwise)

Revenue rose 6% to $4.3bn, or to $1.8bn once money allocated to the group's central fund, hotel reimbursements and exceptional items are excluded. Operating profit rose 6.2% to $805m, with growth in all three sectors offset by higher central costs.

In The Americas, revenue rose 5.4% to $1.1bn, with new openings and a 2.5% increase in revenue per available room (RevPAR) both playing a part. After a weaker Q3, US RevPAR returned to growth in Q4, up 0.6%. Profits increased 4.1% to $663m.

It was a similar story in the Europe, Middle East, Africa and Asia (EMEAA) region, as new openings and a 2.7% increase in RevPAR, helped revenue rise 3.1% to $471m. London hotels enjoyed a particularly strong finish to the year, with RevPAR up 10%, while growth was weaker in France due to recent social unrest. Operating profit rose 14.6% to $196m due to improved efficiency.

Greater China RevPAR increased 6.9%, and with a net 13,774 new openings (the highest among the group's three regions) revenue rose 15.4% to $135m, with operating profit up 19.2% to $62m.

The group added 98,814 rooms to its pipeline, the biggest growth in a decade. 42,766 were in the Americas, 26,918 in the EMEAA region and 29,130 in Greater China. The total pipeline now stands at 270,948 rooms, around a third of the current system total.

A $93m increase in free cash flow, to $609m, helped net debt fell 17% to $1.5bn.

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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.