InterContinental Hotels Group plc (IHG) Ordinary 20 340/399p
HL comment (10 August 2021)
Revenue in the first half was down 5.5% to $1.2bn, as improved performances in the US and China were outweighed by a slowdown in Europe, the Middle East and Africa.
Underlying operating profit more than tripled to $188m, reflecting improved demand across most geographies.
Average revenue per available room (RevPAR) was at 57% of 2019 levels in the first half, with second quarter RevPAR rising to 64% of 2019 levels.
The shares were broadly flat following the announcement.
2020 was the most demanding year in IHG's history, but the clouds appear to be lifting. With a path back to normality coming into view, the focus has turned to IHG's ability to recover.
Firstly, we should mention the stock's valuation. While it's come down somewhat, IHG trades at over 34 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 last year. That's thanks to a stellar operating model - one we particularly admire.
Despite having a portfolio of nearly 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.
There are signs in first half results that a recovery is starting to gather pace. The US is looking promising, 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. While Europe was the group's weakest performer, green shoots started to show in the second quarter as lockdown restrictions eased.
Having been hit first by the pandemic, China had been well on the way to recovery. But renewed restrictions thanks to variant concerns meant there was some backslide in June. China's a relatively small market for IHG, albeit important for future growth, and one month's worth of waning demand isn't a deal-breaker. But we're mindful that China seems to be a few steps ahead of the rest of the world when it comes to the pandemic. If restrictions tighten it could be a grim forecast for the rest of the world.
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.
IHG key facts
- Price/Earnings ratio: 34.8
- 10 year average Price/Earnings ratio: 18.8
- Prospective dividend yield (next 12 months): 1.2%
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.
First Quarter results
The global estate stood at 884,484 rooms, down 1,552 from 2020.
In the Americas, revenue rose 31% to $296m, reflecting an increase in demand beginning in March. A strong improvement among franchised hotels fed into RevPAR rising to 66.4% of 2019 levels. Underlying operating profits rose from $5m in 2020 to $220m.
Revenue in Europe, the Middle East and Africa declined 37.3% to $84m, reflecting the impact of coronavirus restrictions. RevPAR was 32.3% of 2019 levels, though there was a modest improvement in Q2. The region's underlying operating loss narrowed from $115 to $27m, reflecting $95m of exceptional charges reported last year. 5% of the EMEAA estate was still temporarily closed at the end of June.
Revenue in Greater China more than tripled to $59m, as the first quarter recovery carried through May, though renewed restrictions in June weighed on results. RevPAR rose to 84.1% of 2019 levels in the second quarter, but renewed lockdowns brought that figure down to 78% in June. The segment swung from a $12m loss to profits of $31m, reflecting increased revenue and a $3m decrease in exceptional charges.
Underlying free cash flow was $147m, compared to a $66m outflow in 2020. This reflected improve operating profits as well as working capital improvements. Adjusting for currency changes, net debt fell by $71m to $2.5bn.
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 disclosure for more information.
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