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InterContinental Hotels Group - rooms and dividend increase

George Salmon | 6 August 2019 | A A A
InterContinental Hotels Group - rooms and dividend increase

No recommendation

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: 5,076.00 | Buy: 5,078.00 | Change 12.00 (0.24%)
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IHG has reported a 2% rise in underlying operating profit, to $410m. That reflects a 13% increase in revenue to $1bn, as the group added a record 30,000 rooms in the first half.

However, average revenue per available room (RevPAR), was only marginally ahead, due to weakness in China. Overall, the group said it's on track for the full year.

An interim dividend of 39.9 cents is 10% ahead of last year.

The shares were unmoved in early trading.

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Our view

IHG, owner of a multitude of hotel brands like Holiday Inn and the flagship Intercontinental, has a slick operating model.

In managed hotels, the group runs the show on behalf of landlords. But for franchisees, IHG licences a brand to the hotel owner and directs reservations to the property from its global online bookings system. In both cases, it collects revenues from the hotels without tying up money actually owning the properties. That makes IHG light on its feet when it comes to maintaining and expanding the estate.

The group's also 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 the end of next year.

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

The hospitality industry is in the direct line of fire when economies hit a rough patch. If individuals or businesses are feeling the pinch, an InterContinental suite is a luxury they can do without. Ongoing trade wars, stuttering Chinese growth figures and the innate unpredictability of Donald Trump mean there are a few looming doubts over the two important geographies. The Americas provides about half of revenue, and Greater China over half the future pipeline of openings.

To its credit, IHG's capital-light model means it'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.

Overall we think exposure to US and Chinese 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 an enviable ordinary dividend record, of course there are no guarantees though. For now, the shares offer a prospective yield of 2.1%.

We think the IHG business model is attractive, but a fairly high valuation of 19.7 times expected earnings, means we aren't alone.

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Half Year Results (percentages given at constant currency and excluding portfolio changes)

The global estate stood at 856,000 rooms at the end of the half - including 10,000 closures during the period. The rise in underlying operating profit reflects growth in the key US and China divisions.

In The Americas, revenue improved 1.6% to $520m, as 11,000 rooms in 96 hotels were opened. RevPAR increased 0.1%, with a more disappointing second quarter. That reflects the later timing of Easter, as well as a tougher comparable. Underlying profits rose 3.6% to $344m.

The Europe, Middle East, Africa and Asia (EMEAA) region saw RevPAR increase 0.2%, as positive trends in occupancy rates - particularly in London - offset declines in France, driven by the unrest in Paris. Trading was also tough in the Middle East, due to increased supply and political unrest. The 2% decrease in operating profit to $88m is expected to reverse in the second half.

Greater China achieved total revenue of $66m, which reflects an 8% improvement, driven by the addition of 13,000 rooms. RevPAR was down 0.3%, mainly due to the strong comparison of last year, and weaker corporate demand. Cost efficiencies helped operating profit climb 32% to $36m.

Free cash flow of $141m was down $120m year on year, reflecting higher tax payments. Net debt rose from $2.2bn to $2.8bn, following the $500m special dividend and $300m acquisition of Six Senses.

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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.