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Intercontinental Hotel Group - China bounces back

Nicholas Hyett, Equity Analyst | 7 May 2021 | A A A
Intercontinental Hotel Group - China bounces back

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InterContinental Hotels Group 20 340/399p

Sell: 5,052.00 | Buy: 5,054.00 | Change -46.00 (-0.90%)
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Intercontinental Hotels Group (IHG) reported a 33.7% decline in first quarter Revenue Per Available Room (RevPAR) compared to the same period last year, and a 50.6% decline versus 2019. However, within that the company reported strong year-on-year growth in greater China and improvements in the Americas.

Occupancy across the quarter was around 40%, with rates around 80% of 2019 levels.

The shares were broadly flat in early trading.

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Our view

2020 was the most demanding year in IHG's history, and the troubled times aren't yet over. But with a path back to normality coming into view, it's important to focus on the big picture and IHG's ability to recover.

Firstly, we should mention the stock's valuation. At over 47 times expected earnings, this is far higher than the ten-year average and an all-time high by some margin. That's largely down to the abnormally low profits expected over the next 12 months. But with the shares trading at a similar price to before the pandemic it's still a big vote of confidence from the market.

We can understand some of the optimism. Despite occupancy levels taking a nosedive, and revenue per available room going with it, IHG remained profitable last year. 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, that operating model saw IHG's free cash flow stay in positive territory in 2020. An impressive feat in this environment. The group has access to substantial liquidity (cash and undrawn credit) of over $2bn, giving it the firepower to respond to opportunities when economies start to recover.

There are signs in first quarter results that a recovery is starting to gather pace. Having been hit first by the pandemic, China is now well on the way to recovery. It's a small market for IHG at present, but growing rapidly as the group opens more hotels across the country.

The US is looking promising too, thanks in no small part to the Holiday Inn brand's focus on domestic travellers. Medium-scale and more budget friendly chains are better positioned to capture demand in uncertain markets. By comparison, brands that focus on international travel and conferences - like the Intercontinental brand itself - look set to be stuck in the doldrums for a while yet.

The exact shape and speed of recovery is impossible to map at this point - which explains why dividends are still off the table. However, we genuinely admire IHG's operating model, and think the future could hold opportunity.

IHG key facts

  • Price/Earnings ratio: 47.0
  • 10 year average Price/Earnings ratio: 18.1
  • Prospective dividend yield (next 12 months): 1.0%

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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First Quarter results

The Americas saw RevPAR fall 28.1% compared to 2020 and 43.0% compared to 2019. Occupancy was 46%, with the group benefitting from a strong US result around the Spring Break period and domestic booking for the summer strengthening.

EMEAA RevPAR fell 62% compared to 2020 and 71.4% compared to 2019.That reflects continued restrictions in many parts of the world. 14% of the EMEAA estate was shut in the quarter.

In Greater China the group saw RevPAR rise 78.2% against 2020 levels, although it remains 37.7% lower than 2019. That reflects the pandemic striking the region earlier and as a result some weaker year-on-year comparisons. The impact remains greatest on Tier 1 cities which are less exposed to domestic and leisure demand.

IHG's footprint remained the same, with openings roughly offsetting closures as the group updated and refreshes its portfolio. The group signed 14,500 rooms to the portfolio during the year.

The group finished the quarter with liquidity of $2.1bn, in line with the full year.

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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.