Intercontinental Hotels Group (LON:IHG) may be “one of the best of breed” but the Holiday Inn owner's valuation is “at odds” with rising headwinds, UBS said on Tuesday, leading it to downgrade its recommendation for the shares to 'sell' from 'neutral'.
IHG shares fell more than 3% to 5,149p on Tuesday morning as the Swiss bank cut its rating even though it did up its price target to 4,700p from 4,500p.
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“It is no surprise that it is highly rated by the market given the quality of its brands, pipeline, strong execution and management team,” UBS's analysts said in a note to clients, nevertheless they saw an “unattractive risk/reward” for the stock.
The bank's analysts noted that IHG shares have risen to a new all-time high at the start of the week yet the company still faces two key headwinds: slowing trends in revenue per available room (revpar) and expected further revpar headwinds from the expansion of the pipeline.
With the Americas representing more than 70% of profits for IHG, US revpar growth is expected to be positive in 2019 but “there are signs” of a slowdown in the revpar cycle, with US occupancy and average daily rate trends softening and the proportion of markets with negative revpar now at 38% compared to 29% a year ago.
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As regards IHG’s pipeline, while it is large and good quality, the analysts think it will be around a 2% drag on average revpar given the mix skews toward lower revpar segments, such as China and the mainstream market.
IHG shares have reached a multiple of 15 times forward earnings per share, above historical averages, which the UBS analysts noted was despite earnings momentum moving sideways to slightly down.