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IHG - expects to report tough second quarter

Sophie Lund-Yates, Equity Analyst | 30 June 2020 | A A A
IHG - expects to report tough second quarter

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InterContinental Hotels Group 20 340/399p

Sell: 3,836.00 | Buy: 3,839.00 | Change 0.00 (0.00%)
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IHG has confirmed around 10% of its hotels worldwide are now closed. In the Americas closures stand around 5%, while in Greater China these are down to 1%.

Revenue per available room (RevPAR) is expected to decline about 75% in the second quarter, which together with the weak first quarter will see RevPAR down about 52% for the first half of the year. The group also expects to report an underlying operating loss from Owned, Leased and Managed Lease hotels of $25m.

The shares fell 1.3% 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 been hit from all angles.

Now that the market knows the group's hotels are running below the usual capacity it's focussing on other things. 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. That's why it makes sense for the group to help its partners with flexible payments and fee breaks at the moment- stopping franchisees going out of business is worth the near-term hit to IHG's pocket.

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 important.

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 mean IHG has the firepower to weather disruption for now. But the extent, and speed, at which these resources will be depleted depends on how it takes for all hotels to reopen, and when occupancy starts to perk up.

Overall we think IHG is well equipped, but we'll be watching closely for further news on how its franchisees are faring. The crisis isn't over yet and no one can say how long it's going to take for the leisure industry to recover. What is certain though is that the longer the crisis goes on, the bigger the dent and longer the recovery.

IHG key facts

  • Current 12 month forward price to earnings ratio - 25.8
  • Ten year average price to earnings ratio - 15.7
  • Prospective yield - 1.0%

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Trading update

RevPAR fell 82% in April, 76% in May and is expected to be down around 70% in June. Greater China and franchised hotels in the Americas are driving the "steady" improvements in RevPAR. The US franchised estate relies more heavily on domestic travel, meaning it's faring better than more upscale managed hotels, which are more geared towards business and large group travel.

17 of IHG's 26 Owned, Leased and Managed Lease hotels remain closed. For hotels that are open, the group is seeing much lower occupancy levels than normal. This trend is expected to continue as the rest of the global hotel estate begins to gradually reopen.

IHG's on track to reduce Fee Business costs by $150m from 2019 levels, but the majority of these savings won't be seen until the second half of the year.

As at 26 June, IHG continued to have around $2bn in available liquidity. It's taken steps to manage working capital by issuing fee relief and flexible payment options to its partners and will consider extending this help as the situation progresses.

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.

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