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IHG - domestic travel better, outlook unclear

Sophie Lund-Yates, Equity Analyst | 23 October 2020 | A A A
IHG - domestic travel better, outlook unclear

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InterContinental Hotels Group 20 340/399p

Sell: 5,048.00 | Buy: 5,050.00 | Change -50.00 (-0.98%)
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Revenue per available room (RevPAR- a product of how full hotels are and room prices) - was down 53.4% in the third quarter (year-on-year), improving on a 75% fall in Q2. Occupancy rates stood at 44%, with domestic mainstream travel remaining more buoyant than international visits.

CEO Keith Barr said "a full industry recovery will take time and uncertainty remains regarding the potential for further improvement in the short term". 3% of the global hotel estate remains closed.

The shares were broadly flat following the announcement.

View the latest IHG share price and how to deal

Our view

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 - lockdowns hit the hotelier from all angles.

However, despite occupancy levels taking a nose dive, and revenue per available room going with it, the group's remained profitable. Which shows that so far IHG's business model is providing much needed shelter.

That's because despite having a portfolio of nearly 6,000 hotels globally, the group only owns 25. Instead IHG licences a brand to the hotel owner, which means it's not on the hook for hotel running costs. That's kept cash burn to a minimum and enabled the group to offer support to its partners - with flexible payments and fee breaks. Keeping franchisees in business is crucial to IHG's business model over the longer term and so far this seems to be working.

Importantly as lockdowns have eased, occupancy levels have improved, so there's reason to hope this model will continue to work. But against the darkening backdrop of second virus waves, further lockdowns and worsening economic conditions, there's still the risk that an extended crisis could upset things.

For now access to cash remains key and should allow the group to continue to offer help to partners if needed.

The group still has access to total liquidity of just over $2bn and lending restrictions attached to the group's borrowing have been relaxed. Like Whitbread, IHG has made use of the UK government's Covid Corporate Financing pool, borrowing £600m so far.

IHG 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 net debt has remained relatively in check, lower profits will mean it's now a higher proportion of earnings. Not ideal, but to be expected and importantly, thanks to IHG's substantial liquidity, not yet unmanageable.

IHG's shown it has the firepower to weather the disruption and is still well equipped to do so. But the extent, and speed, at which its resources will be depleted depends on how long it takes for hotels to return to pre-Covid levels and that feels some way off. This is particularly true for the large, luxury, managed hotels in IHG's portfolio.

We continue to think IHG is resilient and well equipped to come out the other side of the crisis. Current analyst expectations are for earnings to largely recover in 2022, but that could still be knocked back by further lockdowns and deeper recessions. Given these risks and the group's current valuation, which remains above the long run average, the share price could be sensitive if performance disappoints.

IHG key facts

  • Price/Earnings ratio: 36.0
  • 10 year average Price/Earnings ratio: 18.6
  • Prospective dividend yield (next 12 months): 1.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

In the Americas RevPAR fell 49.8%, reflecting occupancy of 46%. In the US RevPAR fell 47.3%. The US franchised estate saw declines of 43%, while managed hotels dropped 71%. That's because the former is more reliant on domestic travel, while the latter is more geared towards luxury travel.

2% of hotels are closed in the region - mostly bigger luxury hotels. That means the closures are having an adverse effect on margins.

The Europe, Middle East, Africa and Asia (EMEAA) region saw RevPAR drop 70.4%, with Europe the biggest faller. Leisure related demand improved over the summer, but declined again in September. Occupancy levels were 31%, and 9% of the EMEAA estate is still closed.

Greater China had a more resilient quarter, and over 20% of the portfolio achieved positive RevPar growth. Overall RevPAR fell 23%, while occupancy rose from 32% in Q2 to 57%.

IHG is on track to reduce Fee Business costs by around $150m for 2020, and capital expenditure will be around $150m.

Cost savings and better working capital practices meant free cash flow returned to positive territory in Q3. Around 90% of invoices are being paid within 90 days of the due date in the Americas.

The group had available liquidity of $2.1bn at the end of September. The next bond maturity will see £173m repaid in 2022. Including bonds that have been issued and repaid in October, the group's available liquidity is $2.9bn.

IHG's estate grew by 2.9%, with the number of hotels standing at 5,977. 164 hotels were either opened or signed in the period.

Find out more about IHG shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.