Interactive Investor

Is Intercontinental Hotels too expensive?

17th February 2015 12:30

Harriet Mann from interactive investor

Asset disposals hit reported revenue and profit at Intercontinental Hotels in 2014, although the numbers were in line with City forecasts. Macro-economic and geo-political tensions are, however, set to remain, and the shares look as expensive as a night at one of the firm's Crowne Plaza hotels.

Disposals worth $400 million caused a 2% drop in revenue last year to $1.9 billion, generating operating profit of $651 million, down 3%. Strip out exceptional items and basic earnings per share (EPS) grew 12% to 158.3 cents. The total dividend rises 10% to 77 cents per share.

"2014 was an excellent year for IHG as we delivered against our long-term winning strategy for high quality growth," said chief executive Richard Solomons. "We achieved strong revenue per available room (RevPAR) performance of 6.1%, and our best net system size growth since 2009 of 3.4%, increasing our operating profit on an underlying basis by 10%."

Clearly, there have been concerns that political unrest in Thailand and Egypt would hit business in Asia and the Middle East. But the region contributed 10% to group operating profit, with comparable RevPAR up by nearly 4%. And while trading in Europe was strong, excellent RevPAR performance in America counted for over two-thirds of operating profit.

"Looking into 2015, we face many macroeconomic and geopolitical uncertainties, but are confident that our strategy for high quality growth coupled with the momentum in the business positions us well for continued strong performance," Solomons added.

Intercontinental shares fell 4% to 2,475p Tuesday morning, drawn like a magnet closer to the 200-day moving average. They now trade on a forward price/earnings (PE) multiple of over 21 times, near their peak valuation.

Of course, forecast double-digit EPS growth justifies a premium to peers, especially with the strong RevPar momentum in America and the potential for more shareholder returns. But as JP Morgan points out, returns are not going to be as momentous as in the past and there looks to be only limited upside to forecasts right now.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.