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Intercontinental Hotels Group - growth trends slow

George Salmon | 3 May 2019 | A A A
Intercontinental Hotels Group - growth trends slow

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InterContinental Hotels Group 20 340/399p

Sell: 5,118.00 | Buy: 5,122.00 | Change 24.00 (0.47%)
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InterContinental Hotels Group (IHG) saw revenue per available room (RevPAR) rise 0.3% in the first quarter, as pricing growth offset weaker occupancy. That was behind what some analysts had hoped for.

The shares fell 3.8% 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 19.9 times expected earnings, a 12.7% premium to their average over the last 5 years, we clearly aren't the only ones. The recent strong run has pushed the prospective yield down to 2%.

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Q1 trading details

IHG's total room numbers rose 5.4% year on year to 843,000, which are spread across 5,656 hotels. That was boosted by 1,300 rooms (16 hotels) from the acquisition of Six Senses Hotels, while over 60% of global openings were in the Holiday Inn Brand Family.

In The Americas, like-for-like (LFL) RevPAR rose 0.8% against a tough comparison, driven by prices. Within that, RevPAR from US hotels rose 0.6%, outperforming peers. Total capacity rose 2.9%, as the group made a net addition of 1,300 rooms. The group signed 7,500 rooms to the pipeline.

IHG says its hotels in mainland China outperformed the wider market, but RevPAR across the overall Greater China region remained flat. 3,700 rooms opened across 18 hotels in the quarter, and a further 9,800 rooms were signed to the pipeline, the highest quarterly additions in 13 years.

RevPAR fell 0.7% on a LFL basis in the Europe, Middle East, Africa and Asia region, as progress in Europe was offset by soft results in Korea, the Middle East and Australia. Within the UK, the group's London hotels delivered a strong performance, with RevPAR up 4%.

CEO Keith Barr said the group remains on track to deliver $125m of annual savings by 2020, and "while macro-economic and geopolitical uncertainties remain in some markets, the strong fundamentals of our business give us confidence for the balance of the year."

Find out more about IHG shares including how to invest

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.

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