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InterContinental Hotels Group - strong not stellar

Emilie Stevens, Equity Analyst | 18 February 2020 | A A A
InterContinental Hotels Group - strong not stellar

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InterContinental Hotels Group 20 340/399p

Sell: 4,761.00 | Buy: 4,765.00 | Change 4.00 (0.08%)
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Underlying revenue and operating profits for the full year both rose 6% to $2.1bn and $865m respectively. That reflects a slight decline in revenue per available room (RevPAR) in the fourth quarter, finishing the year down 0.3%, offset by over 47,000 net new rooms added in the year.

A final dividend of 85.9 cents was announced, taking the total dividend for the year to 125.8 cents a share, a 10% increase on last year.

The shares remained broadly flat following the announcement.

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Our view

IHG, owner of a multitude of hotel brands like Holiday Inn and 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 this year.

The combination of increasing room numbers, a closer relationship with partners and cost savings would be a heady mix.

Unfortunately 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, unrest in Hong Kong and stuttering Chinese growth figures mean there are a few clouds over two important geographies. The Americas provides about half of revenue, and Greater China a significant chunk of the pipeline.

However, in the long-run we think exposure to the world's two largest economies should bode well. 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 2.2%.

While we think the IHG business model is attractive, a fairly high valuation of 19.5 times expected earnings, means we aren't alone. It also means the group is under pressure to perform and while today's results were strong, they lacked the punch such a price tag commands.

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Full year results (at constant exchange rates unless stated otherwise)

In the Americas, revenue fell 1% to just over $1bn but tight cost control meant operating profits rose 4% to $700m. RevPAR for the year fell 0.1%, reflecting lower occupancy but slightly higher prices. Fourth quarter RevPAR was down 1.6% driven by ongoing softness in small groups, impacting Holiday Inn and Crowne Plaza hotels, as well as an increase in room supply.

In Europe, Middle East, Africa and Asia (EMEAA) underlying revenues rose 20% to $723m with operating profits up 10% to $217m. RevPAR for the year was up 0.3%, with the fourth quarter rising 0.2% - reflecting a trend of higher occupancy levels but lower prices.

Despite unrest in Hong Kong, Greater China saw underlying revenues rise 2% to $135m with operating profits up 16% to $73m - driven by new hotel openings and cost savings. RevPAR for the year fell 4.5% and worsened in the fourth quarter falling 10.5% - reflecting significant price and occupancy declines. Mainland China RevPAR finished the year down 1% but Hong Kong RevPAR fell 27% over the year.

Of the net new rooms added in the year, 20,233 were in Greater China, 14,518 in the Americas and 12,271 in EMEAA. The total pipeline now stands at 283,048, a third of the current system size - key brands include Holiday Inn, Kimpton and avid Hotels.

Free cash flow for the year fell $102m to $509m, reflecting both a decline in cash generated by operations and higher capital expenditure.

Net debt rose 35.6% over the year to $2.7bn, reflecting the payment of a $500m special dividend and $300m acquisition of the Six Senses hotels.

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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.