Inter Continental Hotels offering some comfort
WITH the globe locked down in the past few months, the pandemic has been the toughest time for InterContinental Hotels Group (IHG).
And unfortunately it’s not over yet. Restrictions may be easing, but the full economic impact of the crisis is just starting to emerge.
A key performance indicator for hotels is revenue per available room (RevPAR) – a product of occupancy levels and room prices.
Last week IHG said it expects RevPAR for the first half of this year will be 52 per cent lower than last year. However, it would be wrong to write IHG off completely.
Despite a portfolio of thousands of hotels, it only owns around 25 of them. Instead IHG licenses brands, like Holiday Inn or Six Senses, to the hotel owner in return for a percentage of the hotel earnings.
This model has provided IHG with some protection as it doesn’t have to pay for the hotels’ running costs.
That means that despite disruption it’s still expected to be profitable this year. However, if franchisees start to go out of business, problems could start.
Global diversification should help too. While things in Europe look set to remain challenging, conditions in the Americas and Greater China (which make up over half of group revenue and profit) are promising.
IHG went into the crisis in relatively good shape and, despite the sizable challenges, it remains resilient. Around £120million in cost savings have been found pretty quickly and the group has access to £1.6billion in cash if it needs it.
This means it can help others and provide crucial payment flexibility to franchisees. IHG remains well equipped to continue to weather the disruption, but the extent of the damage and length of the recovery depends on how long economies and leisure sectors take to get back on track. Given the challenges ahead, a valuation of 27 times future earnings feels a bit steep.
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