2023-04-06 12:19:50 ET
Summary
- Accor has underperformed its peers and my own expectations since I first covered the name in 2021, possibly due to a protracted earnings recovery and broader macro concerns.
- Demand looks set to be more resilient than it otherwise would be in a global slowdown, and management is guiding for decent RevPAR growth this year.
- At 17.5x pre-COVID free cash flow, these shares offer a good blend of value and growth for the long-term investor.
This is a frustrating period for Accor ( ACCYY ) ( ACRFF ) shareholders. I was bullish on the French lodging firm when I first covered it all the way back in Q3 2021, but the ADSs have lagged US peers by a clear margin in the intervening period. Local currency returns for the Paris-traded shares are slightly better (the Euro has depreciated versus the dollar in that time), but only slightly and not enough to bridge the underperformance gap in a meaningful sense.
While the stock remains largely flat these past 18 months, business is not: underlying trading has now moved on nicely from pre-COVID levels while Accor's financials and capital returns are getting there, albeit a bit more slowly than expected.
Frustrating as that may be for shareholders, it does make the stock a more interesting proposition than it was in 2021. Back then, we still had a ways to go before Accor and the global lodging industry would be in a position to post positive pre-COVID comps, albeit with some compensation here in the form of a 25% lower share price versus early-2020. Today, trading is surpassing levels seen in FY 2019 while the share price still remains at a circa 25% discount to pre-COVID levels. The wild card is, of course, the current macroeconomic backdrop, with inflation and global growth/recession fears representing real headwinds to travel and room demand.
While the above will be an important near-term consideration, there is low-hanging fruit on the demand side, and I'm more bullish than I otherwise would be in a slowdown. All said, with these shares still comfortably below pre-COVID levels, I'm inclined to think they represent an interesting 'growth at a reasonable price' proposition for investors with a longer-term horizon. Buy.
RevPAR Comfortably Surpasses Pre-COVID Levels
Accor's investors have had to wait good two-and-a-bit years for this, but the latter part of 2022 finally saw trading move past pre-COVID 2019 levels. Systemwide and for the full year, 2022 revenue per available room ("RevPAR") of €62 was up a little over 2% versus FY 2019 on a like-for-like basis (i.e., excluding the effect of foreign exchange and acquisitions/divestitures).
Unpacking that a little, growth was mainly driven by a high-teens increase in the average room rate (to €103), with the full-year occupancy rate still around 9 points below pre-COVID FY 2019. Trading continued to show sequential improvement throughout the year: Q4 2022 RevPAR was up over 15% on same-period FY 2019 levels, with average room rate up 25% and occupancy down 5% on the same basis.
Geographically, almost all of the company's operating areas are now posting positive RevPAR versus 2019 levels. Asia Pacific is the sole exception, where Q4 RevPAR was still down 6% on same-period 2019 levels due to China's strict COVID containment restrictions.
Financials Catching Up
Some key P/L lines as well as cash flow have been a little bit slower to recover, but following a strong second half they are now catching up.
With that, full year FY 2022 revenue of €4.224 billion represents 4% like-for-like growth in 2019, while Q4 revenue of €1.350 billion was up 24% on the same basis. The aforementioned higher RevPAR obviously played its part, though at 802,000 rooms Accor's global hotel portfolio is also around 8-9% larger than it was pre-COVID.
Earnings and cash flow have been a bit more sluggish as higher inflation has put some downward pressure on margins. FY 2022 EBITDA of €675m was 11% lower like-for-like versus 2019, with a margin of 16% around four points below FY 2019 levels. That was in large part due to personnel and marketing expenses running 8% and 11% higher, respectively, than before the pandemic. Similarly, recurring free cash flow ("RFCF") of €373m was almost 15% below the FY 2019 figure.
On the plus side, management made whole the difference in terms of the reintroduced dividend (its stated policy is to pay out 50% of RFCF), which at €1.05 per share is in line with pre-COVID levels. Furthermore, performance in the back half of last year was again strong, with both H2 2022 EBITDA and RFCF coming in higher than comparable-period 2019 levels.
The Outlook
Macroeconomic issues have now replaced COVID as the main point of concern here. In an ordinary global slowdown/recession (if there is such a thing as one), I'd be penciling in a low single-digit decline in RevPAR based on past performance. That seems unlikely to be the case this time around, as there is still some low-hanging fruit to be plucked from the hitherto uneven COVID recovery. China is the most obvious example of that - where RevPAR was still well below 2019 levels but has now rebounded strongly following the easing of restrictions.
With the above in mind, management expects FY 2023 annual RevPAR growth to land in the 5-9% range, while I also expect another low single-digit contribution from net unit count growth in terms of the top line. RevPAR growth will likely moderate in the coming years back to the historical trend (I expect around 2-3% longer-term annualized growth), though a 200,000-plus room pipeline should be good for another low-single-digits per annum on top of that.
With franchised and managed hotel fees sporting 70-80% EBITDA margins, longer-run earnings and cash flow growth should land at a higher clip still from operating leverage.
Growth At A Reasonable Price
Accor's shares have been quieter than I expected over the past 18 months since I first covered them, and at €28.64 per share in Paris trading at the time of writing, they remain at a substantial discount to pre-COVID levels. That is probably a reflection of its fairly protracted earnings recovery plus some worries about the near-term global macro environment.
For the longer-term investor, I think the above makes for an attractive entry point. The current share price only maps to around 20x subdued FY 2022 RFCF per share, and that drops to around 17.5x the pre-COVID number. I expect the company to meet that in the very near future.
On a discounted cash flow basis, 3-4% long-term annualized growth would work based on a 9-10% per annum required rate of return, while plugging in my own expectations for high-single-digit growth gets me to a fair value in the €35-€40 region.
Accor has underperformed both peers and my own expectations recently, and the near-term may get a little choppy, but they still offer a nice blend of value and growth for the long-term investor. Buy.
For further details see:
Accor SA: Business Has Rebounded Even If The Stock Has Not