InterContinental Hotels Group Plc

InterContinental Hotels Group PLC (IHG) is into hotel operations. The company owns, franchise, manage and lease hotel. The company has its operations worldwide. Currently, the company has 5,723 hotels and 855,915 rooms under its brand name.

Financial Highlights - H1 Financial Year 2019, ($ million)

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s revenue from reportable segments surged by 12 per cent to $1,012 million against the $900 million in H1 FY18, while on an underlying basis, it increased by 13 per cent. Revenue from fee business surged by 2 per cent to $730 million against the same period in 2018. Operating profit from reportable segments stood at $410 million as compared to $413 million in H1 FY18, while underlying operating profit rose by 2 per cent. Fee margin from reportable margin reduced by 0.2 per cent to 53.7 per cent as compared with the corresponding period of the last year. Adjusted EPS stood at 143.2 cents, a decrease of 1 per cent from the previous year same period data. The company’s total revenue increased by 8 per cent to $2,280 million in H1 FY19 against the $2,113 million in H1 FY18. Operating profit climbed by 14 per cent to $457 million as compared to $401 million in H1 FY18. The total revenue and operating profit increased because of an increase in System Fund from a deficit of $12 million in the year to a surplus of $47 million and a decline in exceptional costs. Total gross revenue was up by 2 per cent (5 per cent at CER) to $13.6 billion. The company’s Basic Earnings per share was 167.2 cents in H1 FY2019 versus 122.6 cents in H1 FY2018, an increase of 36.4 per cent. Interim Dividend per share increased by 10 per cent to 39.9 cents against the 36.3 cents in H1 FY18.

Share Price Performance

Daily Chart as at 18^th September 19, before the market close (Source: Thomson Reuters)

On 18^th September 2019, InterContinental Hotels Group Plc shares were trading at GBX 5,019.00 at the time of writing before the market close (at 3:23 PM GMT) and down by 0.42 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 5,770.00/GBX 3,861.31.

Valuation Methodology

*Peers: J D Wetherspoon Plc, Tesco Plc, Compass Group Plc, Greene King Plc and Cineworld Group Plc.

Conclusion
The company has witnessed a decline in demand in the Hong Kong market due to trade dispute between the US-China. China being the rapidly growing market for the hotel industry, but with an increasing dispute between the US and Chinese governments, the growth has been muted.

In the H1 FY2019, the occupancy rate fell by 0.3 per cent and 1 per cent in Greater China and mainland China respectively. In H2, the company expects to grow its operational efficiencies. The company is focussed on improving its brand portfolio with the launch of new products under Atwell Suites and Six Senses Hotels brands.

However, based on above rationale and supported by valuation done using the above method, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 5,040 (as on 17th September 2019), while we look for any upcoming catalysts.

Whitbread Plc

Whitbread PLC (WTB) is a Dunstable, United Kingdom-headquartered multinational hotel and restaurant growing, with Premier Inn hotel chain among its portfolio. The company also operates restaurant brands, Brewers Fayre, Bar +Block, Beefeater and Table Table. The company is planning to grow its Premier Inn brand in Germany and will open more than 30 hotels by 2020/21, increasing from just two hotels at the moment. Across the UK, the company operates more than 72,000 rooms across 785 hotels.

Trading Update
In the first quarter of FY 2020, the company reported that due to weak trading conditions, the UK’s total accommodation sales declined by 1.5%, while UK like-for-like sales declined by 4.6%. Food and beverage sales in the UK declined by 0.4%, while like-for-like sales decreased by 2.1%. The group also reported that another year of high industry cost inflation is being offset by the efficiency programme undertaken by the group. Domestic hotel demand has been impacted by the ongoing political and economic uncertainty in the UK, which has led to weaker business and leisure confidence. Expansion program in Germany remained on target with the opening of 7,000 rooms.

Financial Highlights – Financial Year 2019 (£, million)

(Source: Annual Report, Company Website)
 
In the financial year ending 28^th February 2019, driven by the contribution of new hotel additions in the current financial year, the company’s underlying revenue (continuing operations) was up by 2.1 per cent to £2,049 million from £2,007 million in FY2018. The underlying profit before tax was up by 1.2 per cent to £438 million in FY2019 from £432 million in FY2018, reflecting ongoing efficiency programme and lower underlying net finance costs. Driven by £178 million of non-underlying items, statutory profit before tax decreased by 39.1 per cent to £260 million. The statutory profit for the year (continuing and discontinued) stood at £3,731 million in FY2019 against £436 million in FY2018. The reported basic earnings per share (continuing and discontinued) stood at 2,040.8 pence in FY2019 against 239.7 pence in FY2018. The operating cash flow declined by 7.1 per cent in FY2019 to £814 million from £877 million in FY2018. In FY2019, the company’s capex was up by £2 million to £557 million.

Share Price Performance

Daily Chart as at 18^th September 19, before the market close (Source: Thomson Reuters)

At the time of writing, on 18^th September 2019, Whitbread Plc shares were clocking at a CMP of GBX 4,422.00 before the market close (at 3:29 PM GMT) and up by 0.04 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 5,162.00/GBX 4,055.00.

Valuation Methodology

*Peers: Merlin Entertainments Plc, J D Wetherspoon Plc, Greene King Plc, Easyjet Plc and On The Beach Group Plc.

Conclusion
The company reported that the underperformance in the first quarter was due to a proportion of business customers and overexposure to the regions which have seen a sharp deterioration in business travel because of Brexit and fears of a downturn. The company remains mindful of potential slowdown until clarity in the macro-environment prevails.

However, the group has been successful in partially offsetting high industry inflation with the help of the efficiency programme undertaken by it, coupled with a robust business model. The group is confident of significant growth opportunities in the UK and internationally, though it remains cautious about short-term market conditions.

Given the long-term structural opportunity, the group continues making an investment in UK & Germany, and German expansion was firmly on target, with 7,000 rooms in the pipeline.

Based on the above rationale and supported by valuation done using the above method, we have given a "HOLD" recommendation at the closing price of GBX 4,420.00 (as on 17th September 2019) based on 21.50x NTM Price/Earnings (approx.) on FY20E Earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.80185 GBP

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