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InterContinental Hotels Group - Q1 declines set to continue

Emilie Stevens, Equity Analyst | 7 May 2020 | A A A
InterContinental Hotels Group - Q1 declines set to continue

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InterContinental Hotels Group 20 340/399p

Sell: 5,026.00 | Buy: 5,030.00 | Change 43.00 (0.86%)
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IHG's revenue per available room (RevPAR) fell 24.9% over the first quarter. As social distancing and travel restrictions came into effect, the group saw its lowest demand ever, with RevPAR down 55% in March. The group expects this to continue with RevPAR down 80% in April.

IHG said "Covid-19 represents the most significant challenge both IHG and our industry have ever faced".

The shares dipped slightly on the news.

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 been resilient in the face of 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. We're worried 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 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%. And while IHG said it could last for at least 18 months in a scenario of totally empty hotels, we wonder if its franchisees can say the same.

Overall we think IHG is well equipped to weather the storm, but we'll be watching closely for news on how its franchisees are faring. Mid crisis and with expectations for things to get worse, it's too early for a prognosis for IHG or the leisure sector. What is certain though is that the longer lockdowns last, the bigger the dent and longer the recovery.

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Q1 Results

In the Americas, IHG's biggest market, RevPAR declined 19.3% in the quarter, driven by declines in occupancy. In the US, the group said its results fared better than the industry in March when RevPAR fell 49%. The group said it benefitted as its hotels are largely in non-urban areas and are less reliant on international visitors - domestic travel makes up 95% of demand.

At the end of April, IHG's Americas estate was around 90% open, reflecting closure of roughly 440 hotels. RevPAR is expected to drop 80% in April, and occupancy levels in open hotels are expected to be around mid-20%.

Europe, Middle East, Asia & Africa RevPAR declined 25.7% in the quarter and was down 63% in March. IHG expects it to drop to 90% in April. At the end of April, the EMEAA estate was half open, with around 560 hotels closed. Hotels occupancy is running in the low 20% range.

In Greater China RevPAR declined 65.3% in the quarter, but after a drop of 89% in February the group has seen a gradual recovery. IHG expects this to continue and RevPAR to be down around 75% in April. At the peak of the crisis hotel occupancy was around 5%, which has now improved to the mid-20s. 10 hotels remained closed at the end of April.

IHG closed more hotels than it opened in the quarter, reducing the total number of rooms by 2,001 to 881,562. However, the total number of rooms is still up 4.6% on last year. Notably the group still managed to open 1,000 rooms in March. Having signed 104 new hotels (14,000 rooms) in the quarter, IHG's future pipeline now stands at 288,000 rooms.

IHG previously announced that every 1% change in RevPAR resulted in a $13m change in operating profits. However, in light of closing the hotels they own themselves, this is expected to reach $14m this year. This is before taking into account any of the group's cost reduction and cash saving plans, which IHG say are on track.

Within the group's $2bn of liquidity, IHG has $1.2bn of cash on deposit and undrawn bank facilities of $850m. IHG says that's sufficient headroom to operate for at least 18 months with empty hotels.

As previously announced, 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.

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 for more information.

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