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IHG - dividend resumes as profits rise

Matt Britzman, Equity Analyst | 22 February 2022 | A A A
IHG - dividend resumes as profits rise

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

InterContinental Hotels Group 20 340/399p

Sell: 4,402.00 | Buy: 4,406.00 | Change 211.00 (5.03%)
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Full year revenue per available room (RevPAR) grew 46% and came in 30% lower than pre-pandemic levels. Recovery was helped by increased travel demand and the easing of restrictions.

Underlying revenue grew 39% to $1.4bn, which fed into a 138% rise in underlying operating profits to $531m.

The board has proposed a final dividend of 85.9 cents, marking the resumption of payments as dividends were suspended during the pandemic.

The shares rose 1.5% following the announcement.

View the latest IHG share price and how to deal

Our View

We might not be completely out of the woods yet, but as the world reopened over the past year the Marriott owner was primed to take advantage. And strong demand for US staycations helped the group beat analysts' profit expectations.

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 25 times expected earnings, far higher than the ten-year average. That's largely because profits are lower than they once were, but it's a big vote of confidence from markets hoping IHG will bounce back.

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 just shy of 6,000 hotels globally, the group only owns 19. 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 was crucial to IHG's business model, so this was the right (albeit expensive) move in our view.

With operating profits back on the rise, free cash was able to come along for the ride. That puts the group is a strong financial position, with access to substantial liquidity ($2.7bn of cash and undrawn credit) - providing the firepower to respond to opportunities as economies continue to recover.

The group took the opportunity presented by the pandemic to reshuffle its portfolio a bit - reviewing Holiday Inn and Crowne Plaza sites. That review led to the closing of 151 hotels, with a further 83 in the Americas and EMEAA committed to improvement plans. 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 hit revenue in the short term, it's probably a sensible decision - especially as plenty of new hotels are queuing up to join the club, accounting for around 270,000 to be opened rooms.

With the recovery gathering pace, management felt confident to reinstate the dividend which'll come as welcome news to investors - although no future dividends are ever guaranteed. We're fans of the business model and IHG looks to be on solid foundations. But we can't overlook the high valuation, which adds a lot of pressure to the recovery continuing as expected.

IHG key facts

  • Price/earnings ratio: 25.0
  • Ten year average Price/earnings ratio: 19.8
  • Prospective dividend yield (next 12 months): 1.5%

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 (all figures underlying)

In the Americas, increased domestic demand helped revenue grew 54.1% to $763m. RevPAR was up 54.0% as occupancy rose 15.9 percentage points, and was 60%. That reflected gains for both the fee business and owned/leased sites, up 51.2% and 89.5% respectively. Operating profit grew 84.3% to $562m.

Europe, Middle East, Africa and Asia (EMEAA) continued to be impacted by restrictions in the first half. Improving conditions over the second half helped RevPAR grow 35.0% for the year, with occupancy up 9.1 percentage points. Revenue followed suit, up 35.3% to $303m. That reflected broad-based growth across both franchised and owned sites. Operating profit improved from a loss of $54m last year to a profit of $5m.

Greater China saw revenue increase 34.1% to $110m, with RevPAR up 20.6% and occupancy up 6.9 percentage points. Early recovery was hampered by temporary restrictions in place throughout the second half of the year, especially in China. Operating profits grew 44.4% to $52m.

The group opened 44,000 new rooms over the year, but that was more than offset by planned removals which included 151 Holiday Inn and Crowne Plaza hotels. That means the overall estate now has 880,327 rooms, down 0.6%. The total global pipeline stands at 270,960, with more than 40% under construction.

Free cash flow increased from $29m to $571m, driven by the improved operating profits. At the end of the period net debt stood at $1.9bn, an improvement from the $2.5bn seen the previous year. The ratio of net debt to cash profits (EBITDA) is now 3.0 times, at the top end of the 2.5-3.0 target range.

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.