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InterContinental Hotels Group - Q1 RevPAR down 25%

Emilie Stevens, Equity Analyst | 27 April 2020 | A A A
InterContinental Hotels Group - Q1 RevPAR down 25%

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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: 4,320.00 | Buy: 4,326.00 | Change 208.00 (5.07%)
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IHG expects first quarter revenue per available room (RevPAR) to have declined by 25%, which includes a 55% decline in March.

Having secured new financing arrangements, the group announced access to total available liquidity of $2bn.

IHG will provide further details in an update on May 7.

The shares rose 2.2% 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 Holiday Inn to Intercontinental, 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 has reacted positively to the group's coronavirus updates so far. That's pretty big given that it used to dip at the mere sniff of a RevPAR decline and highlights we're living in different world at the moment. Fundamentally, it's one where cash matters most.

IHG's business model should provide some shelter initially. Despite having a portfolio of over 5,000 hotels globally, the group doesn't actually own many of them. Instead IHG licences a brand to the hotel owner, which means it's not on the hook for hotel running costs. An extended crisis could upset this though, if franchisees are forced out of business that poses a bigger risk to cash and long term profits.

IHG's immediate cost savings measures will add to the group's resilience but they can only go so far, which means the balance sheet is where both IHG and investors will be focussed.

The group entered the crisis with debt higher than it has been previously - net debt was 2.4 times the level of cash profits (EBITDA) at the end of 2019. And while that's higher than we'd ideally like, it's not unmanageable.

The group now has access to total liquidity of $2bn and importantly lending restrictions attached to the group's borrowing have been relaxed. IHG's also joined Whitbread in the UK government's Covid Corporate Financing pool too, borrowing £600m so far.

These measures are good news for now but whether they're enough depends on two bigger questions - how long lockdowns last and after that, how long until hotels are full again. At the moment IHG's hotels are largely open for business, but occupancy levels are only around 20%.

Overall we think IHG is well equipped to weather the storm, but there will be ups and downs from here. The one thing we can say for sure is that the longer lockdowns last, the bigger the dent and longer the recovery period.

Register for updates on InterContinental Hotels Group

Finance and Trading Update

IHG's Q1 performance was in line with the group's expectations set out on March 20, recognising that global travel and social restrictions are resulting In the lowest ever hotel demand.

Trading in Greater China continues to improve with only 12 out of 470 hotels now closed. In the US 10% of hotels are closed and EMEAA 50%.

Occupancy levels in open hotels are around 20% or above across the business.

Within the group's $2bn liquidity, IHG has access to $1.35bn cash on deposit and undrawn bank facilities of $660m.

The conditions attached to IHG's debt, known as covenants, have been amended to provide flexibility. Restrictions requiring net debt and interest payments to stay below a certain proportion of cash profits have been waived until 31 December 2021. However, the group must maintain access to at least $400m in liquidity, defined as unrestricted cash and undrawn facilities with a remaining term of 6 months. This will be tested on 30 June 2020, 31 December 2020 and 30 June 2021.

IHG have borrowed a further £600m ($740m) from the UK government through its Covid Corporate Financing Facility - which provides short term funding for companies that were in sound financial health prior to the pandemic.

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 disclosure for more information.