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IHG Group - slower Q4 recovery, outlook uncertain

Sophie Lund-Yates, Equity Analyst | 23 February 2021 | A A A
IHG Group - slower Q4 recovery, outlook uncertain

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InterContinental Hotels Group 20 340/399p

Sell: 5,166.00 | Buy: 5,170.00 | Change -76.00 (-1.45%)
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Full year revenue per available room (RevPAR- a product of how full hotels are and room prices) fell 53% for the full year. The reintroduction of restrictions in key markets during the fourth quarter slowed recovery. Underlying revenue fell 52% to $992m, and underlying operating profit (excludes the effect of exchange rates and disposals) declined 75% to $219m.

CEO Keith Barr said the new financial year has started with many Covid challenges still in place. Meaningful recovery is "unlikely" until later in the year, and is dependent on vaccine roll outs.

The shares rose 3.9% following the announcement.

View the latest IHG share price and how to deal

Our view

2020 was the most demanding in IHG's history. But with a path back to normality coming into view (if you squint), it's important to focus on the big picture and IHG's ability to recover.

Firstly, we should mention the share price valuation. At over 47 times expected earnings, this is far higher than the ten-year average and an all-time high by some margin. This is a mark of confidence from the market, and current analyst expectations are for operating profit to largely recover in 2022. But it also means the share price will be sensitive to any disappointment.

We can understand some of the optimism. Despite occupancy levels taking a nose dive, and revenue per available room going with it, IHG has remained profitable on an underlying basis. That's thanks to a stellar operating model - one we, and the market it would seem, particularly admire.

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, so this was the right (albeit expensive) move in our view.

Coupled with impressive reductions in capital expenditure, meant IHG managed to generate cash in 2020. An impressive feat in this environment.

The group also has access to substantial liquidity (cash and undrawn credit) of over $2bn. This gives IHG has breathing room, although net debt as a proportion of profits is higher than we'd like.

However, a meaningful recovery for the industry still someway off, and dependent on vaccine rollouts. It's going to be a long while before hotels are bustling with long-haul travellers or conference delegates. IHG's exposure to higher-end travel and larger scale business events in its InterContinental hotels makes this tougher to bare.

It's the Holiday Inn brand that will pull IHG through the mire. Economically, the medium term looks rocky at best. This medium-scale and more budget friendly chain is better positioned to capture demand in these conditions. This is particularly true in the group's biggest market, the Americas, which is better primed for rebounding domestic travel.

The exact shape and speed of recovery is impossible to map at this point. That's why dividends are still off the table, and could be for some time.

We genuinely admire IHG's operating model, and think the future could hold opportunity. But we're unsure about demand patterns, particularly for the higher end of IHG's portfolio. That means that the medium term is likely see ups and downs.

IHG key facts

  • Price/Earnings ratio: 47.5
  • 10 year average Price/Earnings ratio: 17.4
  • Prospective dividend yield (next 12 months): 0.9%

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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Full year results

The underlying operating profit of $219m excludes exceptional costs of $270m - most of which was recognised in the first half of the year. Including these items, operating profit fell to a loss of $153m. The bulk of these non-cash charges relate to a reassessment of the value of IHG's assets, because of the pandemic.

In the Americas, revenue of $512m was down 50.5% on an underlying basis. there was a 48.5% reduction in RevPAR, reflecting occupancy declines of 26.5% to 42.3%. Franchised hotels fared better than managed ones, because of a higher exposure to domestic demand, while managed hotels rely more heavily on large group business. Operating profit fell 57.5% to $296m, led by the declines in owned, leased and managed lease hotels.

The Europe, Middle East, Africa and Asia (EMEAA) was hampered by second waves of coronavirus in Europe during the fourth quarter, slowing recovery. Underlying revenue fell 69% to $218m. RevPAR was down 65% for the full year. Fee business revenue declined 67%, while revenue from owned and leased sites dropped 70.5%. Overall underlying operating losses were $54m, compared to profit of $206m in 2019.

Greater China underlying revenue fall 43.8% to $77m, with a RevPAR decline of 41%. The region has seen the biggest recovery in RevPAR, with this down just 18% in the fourth quarter. Operating profit more than halved to $35m.

The global estate now has 886,000 rooms, with growth of 0.3% over the year. 56,000 rooms were signed. 60% of all openings, and half of new signings were attributed to Holiday Inn. The group thinks its Holiday Inn brand is better positioned to capture demand during economic downturns.

The payment rate of invoices paid by third party owners has been improving. Over 90% are paid within 90 days of the due date in the Americas.

Free cash flow of $29m fell by $480m, reflecting the impact of hotel closures and the lower demand. Net capital expenditure fell to $67m, down from $211m last year. IHG incurred $87m of exceptional cash costs, around half of which relates to re-organisation costs.

The group still expects to spend around $150m (net) on capital expenditure per annum, and up to $350m on a gross basis in the medium term.

Net debt of $2.5bn was down slightly on the end of 2019, and IHG has available liquidity of $2.9bn. This includes cash and access to undrawn credit.

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.