Late cycle: pipeline is king, and IHG is lagging. Downgrading IHG to UW, AC to N, retain WTB OW
supply growth puts pressure on RevPAR? Only if supply growth in turn
fuels stronger room openings. In our coverage, IHG (downgrade from
Neural to Underweight) appears most at risk, with its pipeline not
warranting much acceleration in room openings, and leaving it as
essentially a cycle play. In contrast, we see Whitbread (reiterate
Overweight) as now a de-risked “pure rollout” story with little reliance on
cyclical upside. Accor (downgrade from Overweight to Neutral) has a
more balanced profile, but consensus expectations appear high.
* IHG: UW, 17.9x CY17e P/E, PT 2,865p ie 2% potential downside.
IHG’s December 2015 pipeline does not support a marked acceleration
in room openings, in our view. Signings represent 30% of the existing
network, compared to 40% at a similar stage of the past cycle. We
believe management is addressing these concerns, but the short-term
consequence is an increase in development costs ($7m guided for
FY16e, ie a -40bp margin drag for the group). Market expectations seem
optimistic in this context (JPMe FY16e EBIT $687m, -2.5% below
Bloomberg consensus). Our 6.1% comparable 2016e-2018e EPS CAGR
is predicated on 2.7% RevPAR growth and 3.3% room openings.
* Whitbread: OW, 13.7x CY17e P/E, PT 4,400p ie 17% potential
upside. WTB looks set to deliver 10% EPS CAGR by 2018e, predicated
on only 1.7% RevPAR growth and 6.8% room openings. FY16 ended on
a supportive note with regard to the ongoing rollout, with over 4,000
room openings in Q4 alone and a higher mix of lower-risk room
extensions announced for FY17e. Market expectations are now largely
rebased on both the P&L and the cash flow side (JPMe FY17e PBT
£570m, -0.7% below consensus, and capex £705m, now only +3.5%
higher vs +29% higher in January).
* Accor: N, 17.2x CY17e P/E, PT €42 ie 8% potential upside. Accor boasts
a record strong pipeline, and benefits from more margin upside than peers
on the back of ongoing real estate restructuring. Our 12.5% comparable
2016e-2018e EPS CAGR is predicated on 2.8% RevPAR growth, 6.0%
room openings, and +220bp margin improvement. But following the
acquisition of OneFineStay, we now see the investments in digital opex as
unlikely to be phased out in the short term, which consensus expectations
do not yet reflect (JPMe FY16e EBIT €720m, -5.5% below consensus).