2023-08-15 12:40:41 ET
Summary
- InterContinental Hotels Group has continued to see revenue growth - including among brands with a higher average daily rate.
- In addition, the stock looks more attractively valued than in previous years on the basis of Price/RevPAR.
- I revise my view on InterContinental Hotels Group from hold to buy.
Investment Thesis: I revise my view of InterContinental Hotels Group from hold to buy, on the basis of continued revenue growth as well as an attractive Price to RevPAR ratio.
In a previous article back in May, I made the argument that InterContinental Hotels Group ( IHG ) remains a hold in the short to medium-term, due to the stock potentially being expensive on a P/E basis. However, I also made the caveat that if we saw significant volume growth across the hotel's more competitively priced brands, then the stock could still see further upside going forward.
Since then, the stock has ascended to a price of $76.56 at the time of writing:
The purpose of this article is to elaborate on why I have decided to revise my view on InterContinental Hotels Group from hold to buy.
Performance
When looking at the most recent earnings results for Intercontinental Hotels Group, we can see that across the company's total comparable estate - Greater China showed the most growth in RevPAR (revenue per available room) at 109.5%.
IHG Supplementary Information – Q2 2023
RevPAR growth across the Americas was more modest at 5.8% - and we can see that the Americas accounts for the bulk of IHG's hotel portfolio - with over 70% of hotels belonging to this region.
Revenue Growth: Americas
To look at performance across the Americas in more detail, here is the revenue growth for brands across the Americas from Q1 2023 to Q2 2023, along with ADR for Q2 2023. Revenue for each brand was calculated as RevPAR * number of rooms for each brand across Q1 and Q2 - with the growth in revenue between these quarters then calculated as a percentage.
Brand | Revenue Growth (%) | ADR (Q2 2023) ($) |
EVEN Hotels | 34.39% | 166.38 |
Hotel Indigo | 27.21% | 189.53 |
Holiday Inn Express | 22.66% | 133.69 |
Crowne Plaza | 21.51% | 144.28 |
Candlewood Suites | 15.58% | 103.16 |
Staybridge Suites | 14.07% | 133.74 |
InterContinental | 12.16% | 236.33 |
Kimpton | 11.52% | 288.14 |
Holiday Inn | 11.46% | 129.53 |
Source: ADR, RevPAR and rooms figures sourced from IHG Supplementary Information - Q1 and Q2 2023. Revenue growth (%) calculated by author.
EVEN Hotels and Hotel Indigo have shown the most revenue growth on a percentage basis, but also have among the lowest room count of all brands at 2,744 and 9,732 rooms respectively.
With that being said, the Holiday Inn Express showed revenue growth of 22.66% - and this brand was the company's largest by number of rooms in Q2 2023 (226,612 rooms).
In this regard, while we have been seeing lower growth on a percentage basis across higher-priced brands such as InterContinental and Kimpton - the fact that quarterly growth remains above 10% is encouraging - as it indicates that growth across the luxury segment has not plateaued in the face of rising prices.
With the Holiday Inn Express accounting for a majority of the company's revenue - the fact that we have continued to see growth above 20% is highly encouraging.
Here is a breakdown of RevPAR and total revenue by brand for Q2 2023:
Brand | RevPAR ($) | Number of Rooms | Total revenue ($) | Revenue share (%) |
Holiday Inn Express | 98.11 | 226,612 | 22,232,903 | 47.55% |
Holiday Inn | 86.26 | 112,422 | 9,697,522 | 20.74% |
Staybridge Suites | 106.36 | 31,347 | 3,334,067 | 7.13% |
Candlewood Suites | 80.43 | 33,066 | 2,659,498 | 5.69% |
InterContinental | 154.65 | 15,694 | 2,427,077 | 5.19% |
Kimpton | 214.53 | 10,412 | 2,233,686 | 4.78% |
Crowne Plaza | 91.78 | 27,590 | 2,532,210 | 5.42% |
Hotel Indigo | 135.65 | 9,732 | 1,320,146 | 2.82% |
EVEN Hotels | 115.09 | 2,744 | 315,807 | 0.68% |
Source: RevPAR and rooms figures sourced from IHG Supplementary Information - Q2 2023. Total revenue and revenue share (%) calculated by author.
My Perspective
As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I find it impressive that Holiday Inn Express has managed to see revenue growth above 20% from that of the previous quarter - along with growth of above 10% for more expensive brands including InterContinental and Kimpton.
In spite of prior reservations that revenue growth could end up plateauing following the post-COVID recovery in booking demand - the most recent growth figures do not imply this and we are still seeing quite respectable growth across brands with a higher ADR.
I had previously argued that due to a higher P/E ratio (both on a historical basis and compared to the company's peers) - InterContinental Hotels Group may not be trading at attractive value at this time.
However, I would like to consider another approach in this article.
Given that RevPAR is one of the key metrics on which hotel performance is judged - I choose to investigate how Price/RevPAR has fluctuated for InterContinental Hotels Group over the last five-year period.
Quarter | Price | RevPAR | Price to RevPAR |
Q1 2021 | 68.9 | 35.55 | 1.94 |
Q2 2021 | 66.69 | 54.22 | 1.23 |
Q3 2021 | 64.29 | 67.7 | 0.95 |
Q4 2021 | 65.21 | 62.57 | 1.04 |
Q1 2022 | 68.82 | 58.62 | 1.17 |
Q2 2022 | 54.05 | 79.92 | 0.68 |
Q3 2022 | 48.61 | 87.37 | 0.56 |
Q4 2022 | 58.34 | 78.28 | 0.75 |
Q1 2023 | 66.6 | 75.2 | 0.89 |
Q2 2023 | 70.45 | 90.51 | 0.78 |
Source: RevPAR figures sourced from historical InterContinental Hotels Group Supplementary Information documents. Price sourced from nasdaq.com (quoted as on day of earnings release for each quarter).
We can see that price to RevPAR has decreased significantly over the period in question:
Price to RevPAR ratio calculated by author.
In this regard - the company is trading at a more attractive value as compared to two years ago from a RevPAR standpoint - and I take the view that continued growth in RevPAR could see upside in the stock continue.
Risks
In terms of the potential risks to InterContinental Hotels Group at this time, there is still the possibility that we might see a plateau in RevPAR growth as we head into Q3.
While growth to date has been impressive, STR reports that normalization could lead to lower growth expectations for the year ahead as easing inflation starts to place downward pressure on ADR (which in turn is expected to affect revenue growth). Moreover, RevPAR of $97.56 is projected for 2023 across U.S. hotels as a whole.
While IHG has seen RevPAR of $99.70 across the Americas in the most recent quarter - a drop in this metric due to potential downward pressure on ADR could in turn temper investor expectations if RevPAR eventually falls short of the $97.56 target for the year as a whole.
With that being said, I take the view that with a lower price to RevPAR ratio than in previous years - the expectations of investors are more tempered at this point in time and I do not see the risk of downside as being overly great.
Conclusion
To conclude, Intercontinental Hotels Group has seen continued revenue growth in the most recent quarter and the company looks to be trading at good value on a Price to RevPAR basis. Based on these two factors, I now take a bullish view on InterContinental Hotels Group and revise my rating from hold to buy.
For further details see:
InterContinental Hotels Group: Strong Revenue Growth And Attractive Price/RevPAR Ratio