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InterContinental Hotels- recovery gathering pace, but some blips

Nicholas Hyett, Equity Analyst | 22 October 2021 | A A A
InterContinental Hotels- recovery gathering pace, but some blips

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InterContinental Hotels Group 20 340/399p

Sell: 4,402.00 | Buy: 4,406.00 | Change 211.00 (5.03%)
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InterContinental (IHG) reported a 66% increase in third quarter revenue per available room (RevPAR) compared to 2020. However, this remains 21% behind 2019 levels. The decline versus pre-pandemic levels reflects occupancy of 60%, with pricing in line with 2019.

Recovery in RevPAR has been driven by domestic leisure demand, which drove occupancy back towards 2019 levels in certain markets. Discretionary business and international trips are showing signs of recovery.

IHG shares were broadly flat in early trading.

View the latest IHG share price and how to deal

Our View

Summer 2021 was characterised by a substantial recovery in staycations, particularly in the US. That might not have been enough to get revenues back to pre-crisis levels, but it bodes well for the future as more lucrative business and international travel starts to pick up.

Before we get stuck into the details of the group's performance we should mention the stock's valuation. While it's come down somewhat, IHG trades at nearly 30 times expected earnings, far higher than the ten-year average. That's largely down to the abnormally low profits expected this year. But with the share price close to where it was 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 pricing going with it, IHG remained profitable in 2020. That's thanks to a stellar operating model - one we particularly admire.

Despite having a portfolio of over 6,000 hotels globally, the group only owns 23. 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, IHG's free cash flow stayed in the black. 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.

The group is taking the opportunity presented by the pandemic to reshuffle its portfolio a bit - reviewing 200 Holiday Inn and Crowne Plaza sites, with 90 already exited. Keeping on top of the portfolio, and making sure all sites live up to customer expectations is key to maintaining a healthy franchise system. So while the closures may kit revenue in the short term, its probably a sensible decision - especially as plenty of new hotels are queuing up to join the club, accounting for 270,000 to be opened rooms.

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. If the world avoids another round of lockdowns, IHG could be in a position to profit.

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IHG key facts

  • Price/Earnings ratio (next 12 months): 29.8
  • 10 year average Price/Earnings ratio: 19.3
  • Prospective dividend yield (next 12 months): 1.3%

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.

Third Quarter Trading Update

The group's number of rooms remains flat year-on-year at 889,000, as the group exited a number of underperforming Holiday Inn and Crowne Plaza Hotels.

In the Americas RevPAR was 10% below 2019 levels (up 76% year-on-year), driven by a strong result in the US. Occupancy reached 66%, with particularly strong results from Holiday Inn and Extended Stay brands. The number of rooms in the region fell 3.6% year-on-year as the group closed 16 Holiday Inn and Crowne Plaza hotels.

Europe, the Middle East, Asia and Africa saw RevPAR some 43% below 2019, although an 86% improvement on 2020. Occupancy stood at 49%. However, there was a broad range of results, with UK RevPAR just 22% behind 2019, while South East Asia & Korea and Australia were 68% behind. HG has now reopened 98% of its hotels, with the number of rooms growing by 1.7% year-on-year.

Greater China RevPAR was 30% below 2019 levels, and 8% below 2020, with occupancy of 49%. The group enjoyed a very strong performance in July, when RevPAR was just 6% below 2019 levels. However, this was offset by weakness later in the quarter as Coronavirus cases rose. Rooms increased by 10.6% year-on-year.

Across all regions the group signed 12,600 new rooms in the quarter, taking the total year-to-date to 45,200. The global pipeline of new hotel rooms now stands at 270,000.

The group reported sustainable cost savings in its fee business of $75m vs 2019. The group has also made temporary cost savings of $25 in 2021.

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.