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InterContinental Hotels Group - hotel demand lowest ever

Emilie Stevens, Equity Analyst | 20 March 2020 | A A A
InterContinental Hotels Group - hotel demand lowest ever

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InterContinental Hotels Group 20 340/399p

Sell: 4,007.00 | Buy: 4,012.00 | Change 0.00 (0.00%)
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Global travel and social contact restrictions mean demand for hotels is the lowest IHG's ever seen - with revenue per available room (RevPAR) expected to drop by 60% in March.

The group announced a number of measures which are expected to reduce costs and preserve cash.

The board has withdrawn its recommendation of a final dividend of 85.9 cents and will not consider further dividends until the current situation becomes clearer.

The shares rose 15% following the announcement.

View the latest IHG share price and how to deal

Our view

With people being told to stay at home across the globe, it's near enough the worst possible time to be in the hotel industry.

IHG's brands range from Hotel Inn to InterContential, and with the Americas providing about half of revenue, and Greater China a significant chunk of the pipeline - it's being hit from all angles.

Despite obvious challenges IHG's share price reacted positively to the group's coronavirus update. That's pretty big given that it used to dip at the mere sniff of a RevPAR decline. It highlights we're living in different world at the moment. Fundamentally, it's one where cash matters most - how much does the company have, how much it can save and how much can it borrow if needed.

For IHG there are two main things to consider - its business model and additional cost saving measures.

Despite having a portfolio of over 5,000 hotels across the globe, the group doesn't actually own many of them. Instead IHG licences a brand to the hotel owner in return for a percentage of their hotel earnings. This model will help protect IHG initially, but if an extended crisis forces franchisees out of business that poses a much bigger risk to cash and long term profits - for this we can only wait and see.

On a cash saving quest IHG's announced further cost savings on top of existing plans to save $125m each year. By reducing non-essential spend and staff costs - including at board level, the group said it could save $150m. A further $100m will be found by reducing this year's capital expenditure plans and around $150m from not paying 2019's final year dividend. Future dividend payments have been paused too.

Net debt is higher than it has been in the past and higher than we'd like it to be. IHG finished 2019 with net debt to cash profits (EBITDA) of 2.4 times. The group has access to $1.2bn in credit but with access conditional on keeping debt as a proportions to cash profits below 3.5 times. With profits under pressure this limit could quickly start to look uncomfortably close.

Overall we think IHG's scale and franchise business model means it's going into the storm well-armed. And while there are glimmers of hope with Chinese hotel's reopening, the true impact of the pandemic is far from known. The shares currently change hands at 9.4 times expected earnings, notably below their longer run average.

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Coronavirus Update

RevPAR fell 6% in January and February fell as a broadly flat performance in the US offset by declines in Greater China, which saw an almost 90% decline in February.

Hotels are reopening in China, with 60 now closed as opposed to 178 at the peak. Recent days have seen improvements in occupancy - albeit at low levels.

The group announced a number of cost reduction and cash conservation measures. In the fee business these include reducing discretionary spend and employment costs, including at executive level. Together these are expected to cut around £150m out of fee business costs.

To support hotel owners and manage their cash flows IHG is delaying renovations and relaxing brand standards.

Not paying this year's final dividend will save IHG around $150m and future payouts are on hold for now. The group is reducing capital expenditure by around $100m this year too.

IHG said it has access to and undrawn credit of £1.2bn. IHG finished 2019 with net debt to cash profits of 2.4 times.

Find out more about IHG shares including how to invest

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