InterContinental Hotels Group's profits surge on strong leisure demand

The resilience of the post-pandemic travel and leisure boom has been evidenced by a slew of recent updates. Despite cost-of-living constraints, airline stocks such as International Consolidated Airlines (IAG) and EasyJet (EZJ) have reported a surge in passenger numbers. The strong demand environment was also apparent in InterContinental Hotels Group’s (IHG) half-year results, with new chief executive Elie Maalouf flagging that in the US and Europe “leisure demand has remained buoyant and business and group travel continues to strengthen”, while “demand has rebounded rapidly” in Greater China.

The Crowne Plaza and Holiday Inn owner reported chunky growth across a range of key metrics, backed up by the company's higher-end brand offering. Operating profits rose by double-digits across all geographies in the half, albeit the postings in China were heavily skewed by the relaxation of travel restrictions there. Revenue per available room (revpar) grew across all markets and outstripped pre-pandemic levels for four quarters on the trot. Occupancy rates came in just below the 2019 level, while global pricing growth in the second quarter was 12 per cent ahead of the same year.

One benefit of a buoyant trading environment is that it provides confidence for the future, supporting investment and expansion. The company’s asset-light business model comes in handy here, allowing it to respond in a timely way to demand trends. There were 34,200 hotel room signings in the first half, up 11 per cent year-on-year, with around 40 per cent of these in the key US market. The overall pipeline now sits at 286k rooms. And management is now pursuing “a new brand targeted at midscale conversion opportunities”. More than 100 hotels are already keen on the brand, according to the company, and IHG is targeting a 25 per cent lower cost per key for hotels converting to the brand than for Holiday Inn Express. Something to watch. 

On the return of capital, the dividend was raised by a tenth while the ongoing $750mn (£586mn) share buyback programme was kept steady. One purpose of the programme is to help the leverage ratio make its way towards the board’s target range of 2.5 to 3 times. It currently sits at 2.3 times. 

Analysts at Jefferies think the upside case of an annual $1bn in cash profits has become more likely on the back of these results. We agree. And with market forecaster STR expecting that the average daily rate for the industry in the US will be 1 per cent ahead of 2019 levels in real terms this year, the outlook for raising prices further looks favourable. But a forward price-to-earnings ratio of 19 times, according to FactSet, looks like it has this factored in. Hold.  

Last IC view: Hold, 5,514p, 21 Feb 2023