Intercontinental Hotels Group PLC’s (LON:IHG) is a disciplined, well-managed company and its strategy to improve underlying system growth is starting to bear fruit, according to Berenberg.
Berenberg raised its recommendation on the stock to ‘buy’ from ‘hold’ but lowered its target price to 4,850p from 5,000p.
“Our revised dynamic valuation methodology, which seeks to incorporate increased macro risk and is supported by multiples, yields a price target of 4,850p,” the broker said.
“On valuation, we put IHG on a P/E of 18x and 13.3x EV/EBITDA, which means that IHG now trades at a modest premium to its peers.”
Berenberg said one of the attractions of IHG is the US$500mln special dividend the company said it would pay in early 2019.
READ: InterContinental Hotels weak as 1% Q3 RevPar rise disappoints; to pay US$500mln special dividend
The broker also noted that IHG remains confident that it will expand its net system size, which represents the number of hotel rooms, by 5.1% in 2019. This could “provide a platform for improved structural growth”, Berenberg said.
Improvements to IHG’s structural growth are being supported by new brands Avid and Voco, which the company believes have the potential to expand to more than 50,000 rooms each.
The Holiday Inn owner has also improved signings for its legacy brands. While Berenberg still thinks this needs to accelerate further before it can be confident that IHG can deliver more than 5% system growth over the long term, it believes the current trends are encouraging.
“The other key issue facing the industry is simply whether the economic cycle remains supportive,” Berenberg said.
“We continue to be a little more optimistic and still see some legs in the current cycle, with modest RevPAR (revenue per available room) growth in 2019.”
Berenberg said it expects a strong share price performance in 2019 based on its view that the cycle will hold through during the year and the company’s estimates for growth.