ACRFF - Accor: A European Hospitality Giant With A Promising Potential

Summary

• Accor SA showed a solid rebound with its substantial revenue growth and margin expansion.
• The impeccable financial positioning is one of its cornerstones.
• Travel rebound may persist, but the growth rate is relatively flatter.
• The stock price appears undervalued for a large company.

Accor SA (ACRFF) still reigns in the global hospitality market. This French multinational company owns and franchises hotels, resorts, and vacation properties. With that, it remains the largest hospitality company in Europe and the sixth largest worldwide. Despite its size, it was not exempt from the scourge of the pandemic and macroeconomic headwinds. It had huge revenue and margin cuts that had limited its operating capacity in the last two years.

Today, it shows a continued rebound as revenues and bottom-line earnings expand. Although it has not reached pre-pandemic levels yet, its efforts have been fruitful. It opened more properties last year, with 4Q 2022 RevPAR exceeding 4Q 2019 rates. Even better, it becomes more prudent with its portfolio to simplify and strengthen its Balance Sheet. This move can help it improve its liquidity further. Cash reserves are more than enough to sustain its capacity and cover borrowings.

Meanwhile, the stock price has been unexciting in the last four years. Even so, it may keep bouncing back this year as the industry regains its footing. It still appears undervalued with decent upside potential. Market opportunities are enticing as millions of people plan to travel amidst inflation. Yet, recessionary headwinds may hamper its potential expansion.

Company Performance

The past two years have been really tough for the hospitality industry, and Accor SA was no exception. Deemed non-essential, this French giant had to limit its capacity amidst the heightened restrictions. The drastic guest decrease led to its RevPAR and operating revenue hitting the bottom. Not a year later, the company showed a rosy rebound potential. However, it took work for Accor due to the geopolitical tension in Europe and inflation. Despite all these, the company retained its place at the top. It remained a durable company with an evident 2021-2022 recovery.

Earlier this year, it presented its impressive performance for the whole year. The operating revenue amounted to €4.22 billion , a 92% year-over-year growth. Even better, it was 4% higher than 2019 revenues. Its half-year revenues also showed continued growth. At €2.5 billion in H2 2022, revenues rose 81% from H2 2021. It was also 45% higher than H1 2022. Various factors contributed to this impeccable 2022 performance.

First, revenge travel has been evident since 2021. It peaked in 2022 as restrictions continued to ease across regions as the vaccination rate increased. The optimistic pandemic outlook, business reopenings, and employment stability stimulated the recovery. Flight volumes in Europe have improved dramatically in the last year. Although they were still lower than 2019 levels, the uptrend was visible. The number of flights increased further in H2 2022. They were 13.5% lower than the 2019 figures but better than the H1 2021, H2 2021, and H1 2022. It is also worth noting that air traffic recovery was the fastest in North America. Meanwhile, the European region had the best performance regarding hotel occupancy. It had 49.4% occupancy levels with an 89.2% RevPAR increase. All these had positive spillovers on ACRFF since 48% and 20% of hotel revenues are from Europe and the Americas. In the figures below, we can see a considerable increase in occupancy and average room rates.

Second, inflation started to relax in 4Q 2022. Although not all European countries saw the same pattern, the region's average had a downtrend. In the US, inflation peaked at 9.1% in June but kept decreasing for the following months. In December, it was only 6.5%, down by 29%. The UK and Euro Area also saw a continued decrease in inflation. As such, many travelers adjusted their itineraries instead of spending less on winter travel. Inflation strained their travel budget, but shorter trips and cheaper alternatives were their solutions. This trend was common among the Millennials and Gen Zers.

Third, Accor SA has an excellent business model. This fee-based model is suitable even in a high-inflation environment. Also, it has better flexibility in its operating capacity, especially during economic downturns. Its popularity and size constitute a solid market presence. This attribute may help it weather macroeconomic challenges this year.

Concerning some of its popular peers, Accor continues to go head-to-head with them. It holds a considerable market share of 9.6%. It is already a substantial increase from 7.3% in the comparative quarter. It also had the second-highest revenue growth, almost twice as much as the peer average. So, Accor stays as one of the industry staples.

Meanwhile, Accor may have incurred higher costs and expenses. The rising price levels and opening of 300 hotels could have raised them. Although the full report has not been released yet, it is safe to make this assumption. As of this writing, we have a net income of €316 million . It is the sum of H1 and H2 values of -€3 million and €319 million. Indeed, the impact of increased revenues offset costs and expenses. Tax may have also been helpful. The net income margin was 7.6% in 2022 and 12.8% in H2 2022. It was not the highest among the group but better than the 12.2% peer average.

How Accor May Remain A Solid Hospitality Company

The softening of demand is evident across industries, alarming many analysts. With the looming recession, lower spending on non-essential goods and services is anticipated. Travel may be affected, proving that revenge travel may not last long. Despite this, I don't think the economic slowdown will lead to another recession. After all, inflation has started to relax with a noticeable difference from its peak. It may keep decreasing as demand normalizes and supply chain bottlenecks clear up. Also, central banks like the Fed are taking conservative measures to stabilize inflation. Consensus estimates adhere to it as CPI forecasts show an uninterrupted decrease this year. The same study shows decreasing fuel prices . It may have a desirable impact in the long run, particularly in airfares and other transportation expenses, food, and hotel services.

In the US alone, 96% of travelers plan to travel this year. About 80% of them plan to spend the same or higher on travel. Again, a substantial portion of Accor's hotel services and franchised hotels are in the Americas. What's more noticeable is their preference of the respondents for international travel. The same study shows an increase in international flight searches. Asia and Europe are their top choices. It is consistent with a global market study showing four European countries among the top travel destinations. More specifically, Europe comprises over 50% of the long-haul or international trips from North America. So, analysts are optimistic about their visitor growth forecast in Europe. Their anticipated growth in 2023-2025 may be slower than in 2022, but there may be a sustained increase in tourists.

What makes Accor a solid company is its prudent financial positioning. It has decent liquidity levels, given its adequate cash reserves. In H1 2022, it amounted to €1.31 billion. We can confirm it with its cash flow from operations, which is twice its capital expenditures. The latest figures may not be updated, but they can prove Accor adequate resources. Also, it continues to dispose of its stake in H World Group Limited. Its 3.3% stake disposal last month amounted to over $400 million , increasing cash levels. This move may help simplify its Balance Sheet and reinvest the proceeds. It has enough cash to cover its borrowings and sustain its capacity. It does not have to raise its financial leverage to keep its operations.

Stock Price

The stock price of Accor SA has shown a solid rebound from its dip in 4Q 2022. It has yet to bounce back to pre-pandemic levels. At $32.92, it is still 5% lower than last year's value. However, the stock price movement has appeared dull since 2018. But it is logical, given the uncertainties caused by the pandemic and recessionary headwinds. The thing is, the stock price is increasing again after the 2021-2022 price corrections. And we hope that the recent price breakout will continue. With the sustained revenue growth and margin expansion, I am also bullish about the stock price. Its high capital returns and operational expansion in 2022 are also things to consider. Its move is timely as the travel upsurge continues. Although macroeconomic headwinds may hamper travel rebound potential, the uptrend may continue. It may speed up again when inflation stabilizes. To assess the stock price better, we will use the DCF Model.

FCFF €480,000,000

Cash €1,310,000,000

Borrowings €4,350,000,000

Perpetual Growth Rate 4.8%

WACC 9.2%

Common Shares Outstanding 262,000,000

Stock Price $32.92

Derived Value €34.9 or $37.04

The derived value shows the stock price is still undervalued. There may be a 12% upside in the next 12-18 months. So, interested investors may take this opportunity to buy ACRFF stocks.

Bottomline

Accor SA maintains an impressive performance and financial positioning. Macroeconomic headwinds may be a hindrance to its rebound in the first half. Yet, the travel outlook is still optimistic, matched with the decreasing inflation. Also, the stock price is still undervalued even after its sustained rebound. The recommendation is that Accor SA is a buy.

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