2023-07-20 10:23:23 ET
Summary
- InterContinental Hotels Group has continued to post improving RevPAR and occupancy numbers driven by returning demand in Greater China and EMEAA.
- Currently, there is little evidence of weakening demand due to softer economic growth, with only some slight concerns regarding financing in light of regional bank issues in the US.
- The shares have returned around 34% since my last piece on the company, and the discount to fair value has narrowed substantially as a result. Hold.
Concerns around the strength of the global economy have been present for quite a while now, and ordinarily that maps to softer results for global hotel stocks like InterContinental Hotels Group (IHG). Covering the company late last year with a Buy rating, I made the point that this time may be slightly different, given how much COVID-linked demand was yet to be unlocked.
This is now very much apparent in IHG's operating performance, and as a result the stock had done well in the intervening period since prior coverage, returning around 34% with dividends and materially outperforming broad-based indices like the S&P 500.
Notwithstanding the macro backdrop, the above does also mean that FY23 should be a relatively strong one for IHG, with KPIs like revenue and earnings finally set to pass their pre-COVID 2019 marks. That is largely in the share price, though, and with the discount to my estimate of fair value narrowing substantially these past nine months I'm downgrading to Hold.
Demand Remains Robust Amid Final COVID Recovery
Although improving, COVID was still very much a negative factor weighing on demand even as late as Q4 2022. Recovery in the Americas had long since been established, of course, but there were still some missing pieces, with the EMEAA region (Europe, Middle East, Africa and Asia) still down slightly on pre-COVID levels and Greater China in an even worse spot on account of the severe restrictions in place there.
Those missing pieces have finally fallen into place to varying extents, leading to robust demand despite worries of a global economic slowdown. With that, EMEAA is now basically on par with the Americas, with revenue per available room ("RevPAR") ending last quarter around 13% ahead of comparable 2019 levels at constant exchange rates ("CER").
IHG: EMEAA Monthly RevPAR Versus Comparable Period 2019 Levels
Data Source: IHG Quarterly Results Releases
Greater China is still down on that score, albeit by a relatively modest 6.6% in March as COVID restrictions were finally being lifted in the region. Importantly, occupancy in the region was down just 1.7 percentage points in Q1 versus comparable 2019 levels.
IHG: Greater China Monthly RevPAR Versus Comparable Period 2019 Levels
Data Source: IHG Quarterly Results Releases
As a result, group performance has continued to move decisively past pre-COVID marks. Occupancy has recovered to within a couple of points of 2019 levels, an improvement on the 5.8 point gap last time out, while overall Q1 RevPAR was up 6.8 points on 2019 levels at CER (versus around 3 points of growth last time).
IHG: Quarterly Group RevPAR and Group Occupancy Versus 2019 Levels
Data Source: IHG Quarterly Results Releases
Looking ahead to the rest of the year, China was still quite weak in January. That should result in modest sequential improvement in terms of the Q2-Q4 group performance - enough to lift year-on-year RevPAR growth to around 10% from the Q1 base. That should be good for around 15% YoY operating profit growth given that unit count growth is expected to grow around 4% this year (more on that below). The $750m buyback program in place for this year should reduce the share count by around 5%, so expect that to take year-on-year EPS growth to around 20% (to ~$3.45 per share) and decisively above pre-COVID levels.
Impact Of Macro Environment Remains To Be Seen
With the COVID recovery still showing up in FY23 numbers, robust demand may be masking the impact of the softish global economy. So far, though, there is little evidence of much of a negative impact, with management noting that the Americas and the EMEAA regions had yet to show any signs of weakening in Q1. U.S. regional bank fears began in March, yet Q1 was marked by a relatively strong finish with Americas posting sequential monthly growth throughout Q1:
IHG: Americas Monthly RevPAR Growth Versus 2019 Levels
Data Source: IHG Quarterly Results Releases
I'd also note that revenue linked to business travelers was also basically flat on pre-COVID levels, and that represents continued recovery given it was lagging Leisure travel:
When comparing to 2019, leisure revenue is up by around 25%, business revenue is now broadly flat and group is down around 12%. We've talked before about groups being the last of the three demand drivers to be fully restored, and we're confident that it will be.
Keith Barr, Ex-CEO IHG, Q1 2023 Earnings Call
Where there are potential signs of softness is on the pipeline side of things, with management noting that financing was a slight issue in the US (and Greater China to an extent too). Regional banks are obviously key lenders to the commercial real estate industry and tightening lending standards is something that could slow hotel development and therefore unit growth.
With that said, management is still confident in hitting 4% unit count growth this year - which is at the upper-end of the 3-4% range I quoted in prior coverage. Interestingly, management indicated that it expects unit count growth to accelerate in future years, which would make the above range too conservative:
I think, yeah, we're very confident in net unit growth being around the 4% mark for this year. And we would expect that to continue to accelerate in the coming years given the strength of the brand portfolio and the expansion that we've done.
Keith Barr, Ex-CEO IHG, Q1 2023 Earnings Call
To the extent that there is a slowdown I expect it to show up more in the FY24 numbers since the COVID recovery is essentially done at this point: EMEAA is now in line with the Americas while Greater China, which remains a bit below pre-COVID levels, is going to require a recovery in inbound international travel in order to hit 2019 marks. That is something that is going to be more of a slow burner as per management:
It's worth noting, whilst a very impressive sequential improvement is clear, going down from 42% in Q4 to down just 9% in Q1, further improvement from here becomes much more dependent on the return of international travel into China, given how this particularly drives demand into the highest RevPAR Tier 1 cities. We remain confident this will fully return as more international airlift comes back as we've seen in other regions, but it will take some time for these areas of demand to fully normalize.
Michael Glover, CFO IHG, Q1 2023 Earnings Call
Shares Move Closer To Fair Value
IHG ADRs trade for $72.26 apiece at the time of writing, having gained over 30% in share price appreciation since my last piece in October. In terms of my model, the only significant change I'm making is to unit count growth, with the 3-4% medium-term annualized rate quoted last time now looking a tad conservative in light of management's comments above. Bumping that up a tad takes my fair value estimate into the mid-$70s area from the low $70s last time. While that still implies slight upside from the current share price, the discount to fair value has narrowed significantly since last time and I see better value elsewhere. Hold.
For further details see:
InterContinental Hotels: Demand Remains Robust Despite Trickier Macro Backdrop