Morgan Stanley has downgraded its rating for InterContinental Hotels Group PLC (LON:IHG) in a sector review highlighting a weaker revenue per available room (RevPAR) and space growth performances.
The US investment bank cut its stance for the FTSE 100-listed firm ‘underweight’ from ‘equal-weight’, although it raised its target price to 4,300p from 3,800p.
In mid-morning trading, IHG shares were 1.7%, or 75p lower at 4,334p.
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In its note to clients, Morgan Stanley’s analysts pointed out: “The hotel cycle drives 80% of the sector's share price performance in the long run, so RevPAR is the key determinant..
“However, this is mostly a macro call, and individual stock performance can vary enormously.”
They added that another key driver is expansion, the opening of new space, particularly for asset light hoteliers whose high margins make them less geared to RevPAR.
IHG opening new space at a slower pace
The analysts noted that IHG's is opening new space “at a slower pace, has a more negative mix to lower RevPAR markets, and a higher rate of hotel removals.”
They added: “Its relatively disappointing net rooms growth of c. 3% in the last 2 years is well known; less well understood is that sales growth from new space is running at c. two-thirds of this”.
The analysts noted that IHG shares trade “on a similar multiple to its asset light peers, but is seeing weaker RevPAR and weaker space growth, suggesting the shares will underperform, with a 1x derating 8% to the share price.”
However, they raised their target price after increasing full-tear 2017 and 2018 earnings per share estimates by 1-4% as they now assume no further slowdown in US RevPAR.