IHG InterContinental Hotels Group

Sector financial performance:

This company, who is primarily a luxury and upscale hotel franchisor, the revenue of which comes from initial fee, percentage-of-revenue royalty fee and marketing/reservation fee and as well from its owned hotels and the hotels it managed, has been grouped into franchised hotel – upscale &midscale sector.

It seems that it is consistent in terms of increase in demand for hotels in this sector and in other sectors: companies in this sector have benefited more from the increase in royalty fees (annual growth rate of 1-6% due to the good performance of their franchised hotels in the past three years. Data indicates that increase in royalty revenue has been primarily attributable to increase in room rate (increased by 1-4% annually) and, to lesser extent, to increase in number of rooms and occupancy rate. However, the trend that the increase in both ADR and occupancy rate slowed down in 2016/17 was obviously observed among the companies in this sector, which caused the increase in RevPAR to go down from average 4% to near 1% in 2017. After starting of 2018, benefiting from larger increase in room rate, rooms and occupancy rate, revenue grew faster than those in 2016 and 2017.

Our data indicate that the typical companies’ average gross margins (including marketing and reservation system fees and expenses and depreciation but excluding managed hotels expenses) are around 64% and all presented an improved SG&A (19%).  The typical operating margin is 43%. Due to continuously increasing revenue the cash flow of companies has increased in the past three years.

According to our analysis, the current companies’ enterprise price/EBI ratio is 32 with an interest/EBITDA ratio of 11%.

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Company performance:

It seems that the franchised managed hotels of this company have performed well in the past three years as indicated by continuing increased in its RevPAR (2-3% annually) including increase in daily rate(mainly) and flat occupancy rate and in rooms (2% average annually). However, the growth seems to be accelerating up in 2018 driven in daily rate growth and room growth.

The first six months of fiscal 2018 compared with the same period of 2017

America RevPAR increased 3.2% (2.9% for 2Q) (2.1% daily rate and 0.7% occupancy rate) and America number of rooms increased 2.3%.

The fiscal 2017 compared with 2016

America RevPAR increased 1.6% (1.2% daily rate and 0.2% occupancy rate) and America number of rooms increased 1.5%.

The first nine months of fiscal 2017 compared with the same period of 2016

America RevPAR increased 1.1% (0.9% daily rate and 0.1% occupancy rate) and America number of rooms increased 1%.

Fiscal 2016 compared with 2015

America RevPAR increased 2.1% (2% daily rate and 0.05% occupancy rate) and America number of room increased 2%.

Fiscal 2015 compared with 2014

America RevPAR increased 4.6% (3.8% daily rate and 0.5% occupancy rate) and global number of room increased 3.2%.

Its gross margin (marketing and reservation system expenses and depreciation) went up by about 500 basis points to approximate 60% in 2017 since 2014 with an improved SG&A as percentage of sales, which down from 26% to 21%. Its operating margin thus went up significantly to about 39% in 2017.

Stock price

This stock currently has an enterprise price/EBI ratio of 30. We think that its stock is being relatively fairly valued with its peers.

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