Still considering IHG to be “one of the most attractive businesses in the leisure sector” due to its strong return on capital, cashflow generation and growth prospects, the current valuation is seen as a bit toppy.
Barclays suggested the current p/e valuation “is ignoring the significant downside risks associated with a macro slowdown”, with the economic cycle being in its 10th year and a recent softening of business confidence, a key lead indicator for the sector.
The analysts reminded clients in a note on Tuesday that IHG operates in a highly cyclical industry, so any decline in revenue per available room “tend to be significant”, such as the 16% drop in 2009, with the de-ratings of the shares “even more so - even for asset-light hotel groups”.
While IHG’s move to a franchised business model means it has lower leverage than in the past, Barclays still sees 36% downside to the current share price in a recession scenario compared with 18% upside potential from its upside case.
“We see risks skewed to the downside,” the analysts said, cutting to an ‘underweight’ rating from the previous ‘equal weight’ with the target price remaining 4,400p.
IHG shares fell more than 2% in early trade but by late morning were down 0.6% at 5,248p.