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InterContinental is another victim of the oil downturn

The fact that oil companies are watching their spending hit the hotel company's revenues in the Middle East
May 9, 2016

The pain of low oil prices was felt by InterContinental Hotels (IHG) after its first-quarter trading update showed weak growth in room revenue growth.

IC TIP: Hold

What's new:

■ Slowing per-room revenue growth

■ Declining oil company spend bites

■ Early Easter impacted business travel

The company registered just a 1.5 per cent rise in revenue per available room - known as RevPAR - which was well down on the 5.9 per cent growth in the respective quarter last year.

The downturn in the oil industry was a key factor, with RevPAR in the Middle East down 10.4 per cent. Presumably staff reductions and a likely curb on excessive travel mean oil groups are spending less on putting people up in hotels. This performance dragged the Asia, Middle East and Africa division's RevPAR down 1.1 per cent, although the other geographies - Americas, Europe and Greater China - saw overall growth in spite of some weak spots.

The fact that Easter fell early (in Q1 as opposed to Q2 last year) also weighed on RevPAR as business travel was affected in the Americas and Europe. The company said it expected this downturn to reverse in the second quarter.

Elsewhere, its extended stay portfolio, which includes the Candlewood Suites brand, had its best first-quarter signings performance since 2008, meaning it has more than 100 such hotels in its pipeline.

 

Panmure Gordon says...

Hold. While the slowdown in RevPAR growth is partially due to the distortion of Easter timing, several markets are also subdued by weak oil markets (management says). More rooms were removed (8,000) than added (5,000), which needs further explanation, but the company reported solid growth in net system size of 2.7 per cent (742,000 rooms) and the pipeline continues to build, with 15,000 rooms signed bringing the pipeline to 220,000, with 45 per cent under construction. With the $1.5bn (£1bn) cash return imminent, our price target of 2,800p and hold recommendation remain unchanged.

 

Numis says...

Hold. RevPAR is now 72 months into the recovery phase in the US and we believe the industry is close to a cyclical peak there. However, in our view, there will be more consolidation activity following the Marriott/Starwood merger: scale drives lower unit costs, helps develop brands and changes relationships with online travel agencies. IHG argues that it has the scale and the brands to compete effectively, but we believe further consolidation may necessitate a strategic rethink.