Down to Neutral post further slowing in the US hotels cycle
What happened
We downgrade IHG to Neutral from Buy following further deceleration in 2Q16 US RevPAR (2Q16 qtd: 2.2%, 1Q16: 2.7%, 4Q15: 4.8%), which leads us to lower earnings expectations (2016-18E EPS cut 3%-9%). We expect IHG’s 2016 RevPAR growth to decelerate to 1.4% (2015: 4.4%) and forecast no EBIT growth in 2016. Medium term, however, we see IHG’s low capital intensity (asset light model) as attractive and expect its 6.2% CY17E adj. FCFy to provide support to its current valuation, particularly in the context of a 15% 2016-19E FCF CAGR. Since being added to the Buy List on December 3, 2010, the stock is up 117% vs. FTSE World Europe up 7.9%.
Current view
While recent steps to increase regulation on peer-to-peer lodging sites such as Airbnb (short-term rental of entire apartments prohibited in Berlin and potentially in New York) may halt their pace of growth, medium term, we still see these sites as a headwind to traditional hotels’ RevPAR growth. On our estimates, c.2pp pa of London RevPAR growth comes through price increases on compression nights, which could be at risk from Airbnb (particularly in gateway cities over summer). We cut our 2017-19 RevPAR forecasts by 0.8pp pa, as we expect IHG to offset some impact through improved revenue management. Similarly, its strong share of the global hotel pipeline (15%) means system growth should accelerate to 3.6% pa over 2016-19E, in part offsetting our lower RevPAR forecasts, while its
business-focused guests, best-in-class loyalty programme, and high level of direct bookings (2015: OTA bookings 13.8%) should limit disintermediation.
IHG trades on a CY16E P/E of 20.7x and 4.9% adj. FCFy, above its historical average (12m fwd since 2012) of 19.2x, consistent with higher forecast growth (12% EPS CAGR 2016-19E vs. 7.5% 2012-15) and returns (CY17E ROIC: 31%), in our view. Our 12-month PT decreases to 3,090p from 3,440p owing to estimate changes, and is based on growth and returns (RevPAR and ROIC) and includes a 15% M&A weighting; 17% upside. Risks: stronger/weaker RevPAR, FX moves, higher/lower supply growth.