Intercontinental Hotels Group (IHG)

 

InterContinental Hotels: Asset light and cash heavy

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The owner of InterContinental, Holiday Inn, and other famous hotel brands is in good shape, having sold its hotels.

In full-year results to 31 December 2015, Intercontinental Hotels achieved a fall in revenue of 3% compared to the previous year and an increase in adjusted profit of 4%.

The fall in revenue and modest profit growth is not wholly indicative of the company’s performance. During the year it disposed of hotels and other assets worth nearly $1.4bn including the InterContinental Paris - Le Grand, and the InterContinental Hong Kong.

The disposals mark the completion of a “major asset disposal programme” that will partly pay for a $1.5bn special dividend if approved by shareholders, and will mean the company has returned £12bn since 2003.

The business, which owns the eponymous InterContinental brand, as well as Holiday Inn and Holiday Inn Express, Crowne Plaza, the newly acquired Kimpton Hotels and Restaurants, which operates mostly in the USA, and others, is now mainly a franchisor and manager of hotels. It’s become a service company earning 95% of revenue from fees charged in the main to hotel owners. In 2015 fee revenue rose 7%.

The company says revenue per available room increased by 4.4% and it added 4.8% more rooms. Worldwide, InterContinental brands account for about three quarters of a million rooms in 5,000 hotels, the majority in the USA.

A share price of £26.92 values the enterprise at just over £10bn, about 18 times adjusted profit. The earnings yield is 6%.

Most stock screeners and websites currently show the share trading on a much lower multiple, making it look like a bargain. I think that’s because they’ve included profit from the hotel disposals in their return figure. But since that profit is a windfall, it’s misleading to include it.

InterContinental is not obviously cheap, but it’s in good shape, earning a return on capital of about 25% and not much less in cash terms (not including cash raised by selling hotels). My estimate of its indebtedness is not only rough, but provisional, because the company does not disclose operating lease expenses in its preliminary results. I have used last year’s to calculate InterContinental’s overall financial obligations, which are less than half of operating capital. In other words the company is mostly self-funded. That will change when it returns $1.5bn to shareholders though.

InterContinental might make a good investment. An additional reason for following it is to learn about the industry, which is changing due to the emergence of online travel agents. They have made it easier for customers to find and compare hotels, which makes the market more competitive, but heightened competition may be an opportunity as well as a threat. Competition favours larger, more efficient operators, which may explain why it’s attracting more hotel owners to sign up.

The company is forthcoming on strategy and the challenges facing the hotel industry, and it may have adapted a profitable, stable business model. In response to a question on acquisitions from an analyst at InterContinental’s results presentation this year, chief executive Richard Solomons, said:

Our focus is on… not being big for the sake of being big. Our focus is on building the brand portfolio out and creating value for shareholders.

Solomon is credited with a significant role in shaping and implementing the company’s “asset-light” strategy since he joined the board in 2003.

A strategy focused on developing valuable brands delivering high levels of profitability and cash flow is intriguing.

So, incidentally, is the the company’s long history (under different guises - Bass, Grand Metropolitan, Six Continents).

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