Not so special InterContinental

For several years InterContinental has been selling off properties in order to return capital to shareholders and focus on an asset-light business model based on using its brands and operational know-how to run hotels owned by other people. The company is set to return its final $1.5bn (£1.04bn) tranche of capital to shareholders on 23 May through a special payout that went ex-dividend earlier this month. This final payment will take total payouts since 2003 to an impressive $12.1bn. But we think the end of capital returns will cause InterContinental to lose some of its allure for certain investors. And, unfortunately, we think this could be coming at a bad time for the group.

For one thing, the downturn in the oil and gas industry is having a detrimental effect on trading. During the first quarter, the pain was most noteworthy in the Middle East where revenue per available room (RevPAR) dropped 10.4 per cent. This weighed on the result from its Asia, Middle East and Africa business - roughly 13 per cent of revenues in 2015 - which reported a 1.1 per cent RevPAR drop overall. The group's business in the Americas, which accounts for about half of revenue, was also affected due to its hotels in areas where the oil industry is prevalent.

The company also potentially faces a broader threat in the US. The hotel market is notoriously cyclical due to both the sensitivity of demand to the economy and because long hotel-build times make it hard to turn new supply on and off. New supply tends to lag demand in the early stages of the cycle, but overtake it in the later stages, which puts occupancy and room rates under pressure.

There are concerns that a cyclical peak may now be reached in the US. The latest quarterly year-on-year RevPAR growth recorded by industry body STR of 2.7 per cent year-on-year was the lowest in 24 quarters. Over the three months, supply growth of 1.5 per cent outpaced demand growth of 1 per cent, although oil price weakness, the weather and the timing of Easter have been offered as explanations. Still, supply is only expected to increase from here, with STR pencilling in growth of 1.7 per cent for 2016 as a whole, rising to 1.9 per cent in 2017.

One thing that could potentially work in InterContinental's favour from rising supply is the fact that it does boast a strong pipeline of rooms. Management said in the first quarter that it signed 15,000 rooms, its highest first quarter number since 2008, including 11,000 rooms in the Americas. Industry consolidation could buoy the stock, too, although it seems InterContinental's management is not in for a blockbuster signing. The group was linked with rival Starwood last year, but the company reiterated that it was not for sale and this potential partner has now struck a deal with Marriott.