InterContinental Hotels Group plc (IHG) Ordinary 20 340/399p
HL comment (6 May 2022)
InterContinental Hotels Group (IHG) reported a 61% jump in first quarter Revenue Per Available Room (RevPAR) compared to the same period last year, 18% lower than 2019 levels. The recovery continues in the Americas and Europe, the Middle East, Africa and Asia (EMEAA), whilst China was impacted by fresh restrictions.
Average daily rates were back in line with 2019 levels, whilst occupancy was 11 percentage points lower.
CEO, Keith Varr, said: ''We've seen very positive trading conditions in the first quarter with travel demand continuing to increase in almost all of our key markets around the world.''
The shares were broadly flat following the announcement.
We might not be completely out of the woods yet, but as the world reopened over the past year the Holiday Inn owner was primed to take advantage. And strong demand for US staycations helped the group beat analysts' profit expectation back at the full year mark, and helped push some solid Q1 results too.
Markets have remained confident in IHG's recovery, highlighted by the high price-to-earnings value the group's traded on over the last couple of years. That's come down now, as profits have recovered, and 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 north 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 in a strong financial position, with access to substantial liquidity ($2.7bn of cash and undrawn credit last we heard) - 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. Plus, work is already underway to replace them, with 66 signings since the review was completed.
IHG's focus on mid-value hotels, which account for around 70% of rooms, mean it's less reliant on business and international travel. Instead, its domestic travel and leisure stays that drive performance, particularly in the US. That's an advantage in the current environment, where a global cost of living crisis means consumers have less disposable cash. That backdrop may not be as supportive of the group's efforts to push further into the premium and luxury space. But with a long-term view, we see the merits.
With the recovery gathering pace, management felt confident to reinstate the dividend which will 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 the market's confidence in the recovery adds a lot of pressure to deliver, so there could be some wobbles along the way.
IHG key facts
- Forward Price/Earnings ratio: 22.4
- Ten year average Price/Earnings ratio: 20.1
- Prospective dividend yield (next 12 months): 1.8%
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 Trading Update
The Americas saw RevPAR rise 58% compared to last year, down 8% on 2019. Occupancy was just shy of 60% as demand was boosted by a strong Spring Break period, with leisure rooms revenue 10% higher than 2019.
EMEAA RevPAR more than doubled year-on-year and was 33% lower compared to 2019. Occupancy was pushing 50% as travel restrictions were lifted across the sector, albeit not all at the same time so there was a spread of performance in the region.
In Greater China the group saw RevPAR fall 7%, 42% lower than 2019. New travel restrictions implemented in March weighed on performance as around a third of the estate was closed. Occupancy was 36% lower than last year and room rates were down 17%.
6,600 rooms were opened over the quarter, broadly in line with last year, and 2,107 were closed. The group signed 120 hotels, bringing the total pipeline to 277,503 rooms.
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.
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