Book into InterContinental Hotels

InterContinental owns market-leading, global, ‘mainstream’ hotel brands, including Holiday Inn, which accounted for over half its 65,000 room openings in 2019. It also ranks second globally in luxury hotels. But InterContinental owns little bricks and mortar itself. Instead, it provides its brands and services to asset owners. It generates nearly three-quarters of its income from fees, receiving a percentage of room revenue from franchisees, which pay to use its branding and access shared systems and marketing. The group's franchisees are mainly based in North America and Europe. Since InterContinental will not typically pay hotel operating costs, in normal times margins on fees are high (54 per cent last year), as is return on capital employed (regularly in excess of 30 per cent).

Almost all of InterContinental’s remaining turnover comes from hotels that the company manages on behalf of their owners. China hosts a significant proportion of its managed sites, but the aim is to move towards the franchise model. The country generates less than a tenth of InterContinental’s operating profit, but boasts 60 per cent of its rooms under construction.

Given that InterContinental relies on partners to fuel its growth through new hotel openings, the impact of Covid-19 on real estate developers could seriously slow progress. But at the time of the full-year results, its pipeline of new rooms was equivalent to approximately one-third of the 884,000 rooms currently in the system and 40 per cent were under construction.

InterContinental's business is very cash generative in good times, which has historically helped it to handsomely reward its shareholders. It has returned $13.8bn to shareholders since 2003, or $5.6bn excluding proceeds from disposals, often via special dividends and share buybacks. Shareholder returns have now been put on hold, though, to save about $150m as the company seeks to reduce cash outflows during the pandemic. The crisis has demonstrated flexibility in other areas of the cost base, with $100m cut from planned $350m gross capital expenditure and $150m of pay cuts. At the end of April, InterContinental had access to around $2bn in liquidity to help it through the crisis and it has been able to relax covenant tests relating to its revolving credit facility.