IHG - InterContinental Hotels Group: Holiday Inn Express Brand Performance Remains Impressive

2023-11-16 13:03:26 ET

Summary

• InterContinental Hotels Group has continued to show growth across RevPAR and occupancy.
• Performance across the Holiday Inn Express brand continues to remain impressive.
• I continue to take a long-term bullish view on InterContinental Hotels Group.

Investment Thesis: I take the view that InterContinental Hotels Group ( IHG ) has the capacity for further upside, on the basis of growth in RevPAR and occupancy across the Holiday Inn Express brand.

In a previous article back in August, I made the argument that InterContinental Hotels Group has the capacity to see further upside going forward, on the basis of continued revenue growth as well as an attractive Price to RevPAR ratio.

Since then, the stock has descended slightly to a price of $75.70 at the time of writing:

The purpose of this article is to assess whether InterContinental Hotels Group has the ability to see continued growth from here taking recent performance into consideration.

Performance

When looking at Q3 2023 earnings results for InterContinental Hotels Group (as released on October 20), we can see that as compared to the prior year's quarter - RevPAR (or revenue per available room) continued to see double-digit growth across EMEAA and Greater China, while growth was more modest for the Americas at 4.1%.

When analysing brand performance across the Americas in more detail (given that this region accounts for just over 70% of the company's portfolio by number of hotels), we can see that when plotting RevPAR against occupancy for Q3 (with bubble size accounting for the number of rooms by brand) - hotel brands that are on the higher end of the occupancy scale also show a lower RevPAR. We would expect this to be the case as these are more mainstream-priced brands marketed for a broader customer segment.

An interactive web-based version of the below graph is available here .

Holiday Inn Express is the company's largest brand across the Americas by number of rooms. It is notable that after the Crowne Plaza and Holiday Inn brands - Holiday Inn Express saw the third-highest occupancy rate at 74%, after that of Candlewood Suites and Staybridge Suites.

Moreover, with an occupancy rate of 74.3% for Holiday Inn Express in Q3 2019 (this time period used as a benchmark for performance pre-pandemic), occupancy rates for the brand have largely recovered to pre-COVID levels, while RevPAR of $101.24 is substantially higher than that of $87.41 in Q3 2019.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I made the argument in my last article that a significant reason for my bullish view on the stock has been encouraging revenue growth across the Holiday Inn Express brand. With both occupancy and RevPAR of the brand having continued to see growth, my view on this stands and I continue to see the potential for upside in the stock if we see growth in these metrics.

I had previously argued that the stock is also trading at a more attractive value from a Price to RevPAR standpoint.

Source: RevPAR figures sourced from historical InterContinental Hotels Group Supplementary Information documents. Price sourced from nasdaq.com (quoted as on the day of earnings release for each quarter).

With a price to RevPAR ratio of 0.8, I continue to maintain that this is the case - with the ratio trading significantly below that of levels seen in 2021.

In this regard, I take the view that given a low price to RevPAR ratio as well as encouraging RevPAR and occupancy growth across the Holiday Inn Express brand - the stock has the potential for upside from here.

Given a price to RevPAR ratio near 1 - I take the view that the stock is fairly valued at this price point - but further growth in RevPAR has the capacity to push the stock past the $80 mark.

When comparing InterContinental Hotels Group to its peers from an EV/EBITDA standpoint, we can see that the stock is trading at the lowest ratio as compared to Hilton Worldwide Holdings ( HLT ), Hyatt Hotels ( H ), and Marriott International ( MAR ).

In this regard, I take the view that the stock could have significant scope for upside as compared to its peers if we continue to see sufficient earnings growth.

Looking Forward

As regards the specific growth catalysts that I see as propelling IHG's growth going forward, I take the view that the company's continued expansion of its portfolio and its continued boosting of its luxury segment in particular has the capacity to drive growth going forward.

According to the CEO of IHG, 50% of the group's hotels are still "in the pipeline" and forming part of the group's upcoming openings.

It is also notable that up until 2015, the InterContinental Hotels & Resorts brand was IHG's only such brand in the luxury segment - but the group has since expanded to include brands such as Kimpton and Hotel Indigo.

In this regard, I take the view that as IHG continues to expand its hotel portfolio across luxury brands with a higher ADR, this will allow the group the capacity to bolster its overall RevPAR and earnings - which is likely to serve as a significant growth catalyst for the stock.

In addition, with growth in RevPAR across brands in China having continued to remain high this quarter - the company has also introduced new hotel brands to the Chinese market - Vignette Collection, Voco, and Garner Hotels.

For the Chinese hotel market in particular, revenue is expected to show a CAGR of 7.68%, which is estimated to result in a market volume of US$106.60bn in 2027, with average revenue per user expected to come to US$323.60.

In this regard, I take the view that with InterContinental Hotels Group's continued expansion into the luxury segment as well as its growth in the Chinese market - the company is in a strong position for long-term growth.

Risks

In terms of the potential risks to InterContinental Hotels Group at this time, the primary risk is that RevPAR growth and occupancy are likely to see a lull heading into Q4, as seasonal demand takes a dip.

With that being said, booking demand has remained resilient overall in spite of economic and inflationary pressures. For instance, STR had previously reported that occupancy and RevPAR across hotels generally could see a downside due to "normalization" post-COVID. However, the company had subsequently reported that 89% of markets had shown growth in RevPAR as compared to 2019.

In this regard, while the stock might see some short-term downside if investor enthusiasm wanes over the winter months due to lower booking demand, I take the view that the long-term outlook for the stock remains strong. That said, such growth will need to come from sustained growth in RevPAR and occupancy levels above and beyond that of 2019 - as IHG's CEO admits that the era of "revenge travel" is over, and hotel companies now need to show growth on their own merits.

Conclusion

To conclude, InterContinental Hotels Group has seen continued growth in RevPAR and occupancy - with performance across the Holiday Inn Express brand remaining impressive. For this reason, I continue to take a bullish view on InterContinental Hotels Group.

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