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InterContinental Hotels - rooms filled but at lower prices

Nicholas Hyett | 18 October 2019 | A A A
InterContinental Hotels - rooms filled but at lower prices

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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: 4,770.00 | Buy: 4,772.00 | Change -5.50 (-0.11%)
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Third quarter revenue per available room (RevPAR) fell 0.8%, despite occupancy holding steady as average prices fell. Slight RevPAR growth in Europe failed to offset declines in the Americas and Greater China.

The shares fell 2.3% 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 plans to 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, a closer relationship with partners and cost savings would be a heady mix. But only 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 pipeline of future openings.

However, we think exposure to the world's two largest economies 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 record of ordinary dividend growth, although of course there are no guarantees. For now, the shares offer a prospective yield of 2.3%.

While we think the IHG business model is attractive, a fairly high valuation of 18.8 times expected earnings, means we aren't alone.

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Third Quarter Trading Update - results at constant exchange rate

IHG opened 13,000 rooms in the quarter, contributing to a 4.7% increase in the global estate, now totalling 865,000 rooms, over the year. The pipeline grew by 25,000 rooms in the quarter, bringing the total to 289,000. IHG are on track to deliver over 5% system growth for the full year.

In the Americas RevPAR declined 0.6%, with occupancy falling 0.2% and prices down 0.3%. In the US, RevPAR declined 0.6% impacted by renovation activity. Elsewhere Canada and Mexico saw declines of 2% while Latin America and the Caribbean grew 6%.

Europe, Middle East, Asia & Africa saw RevPAR rise 0.2% as higher occupancy levels of 0.9% offset price declines of 1.0%. London continues to be a key contributor to growth thanks to its international visitors. Continental Europe saw marginal growth of 1%, but the Middle East, Australia and Japan all saw marginal declines of 1%.

In Greater China RevPar declined 6.1%, driven by price declines of 5.5% and occupancy dropping 0.4%. Hong Kong RevPAR declined 36%, a result of the ongoing political unrest. Mainland China saw RevPAR decline 2% as domestic leisure demand failed to offset fewer business bookings. Trading conditions in Hong Kong are expected to knock $5m off revenues for the year as whole.

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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 disclosure for more information.