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Intercontinental Hotels to show the way for wannabe IWG

Hotel operator IHG has reaped the results from a shift to an asset-light business model a few years ago, but some analysts see clouds on the horizon

Intercontinental Hotels lobby

Intercontinental Hotels Group PLC (LON:IHG) shares hit an all-time high last week, as more investors checked in ahead of the Holiday Inn owner’s interims on Tuesday.

The FTSE 100 group switched to an asset-light business model in the middle of the decade, selling off many of its major flagship properties and focusing on franchising and managing hotels, which lowered leverage and beefed up return on capital and cashflow generation.

In recent months the shares have continued to rise like a lift to the penthouse suite despite a mixed first-quarter update and a few bearish broker notes.

May’s trading update revealed that IHG had opened its 400th hotel in China, among roughly 12,000 rooms opened across the first quarter, but disappointed investors with news that occupancy fell 0.2 percentage points.

Comparable revenue per available room (revpar) was up 0.3% against strong comparative numbers this time last year.

UBS analysts warned last month that said the stock was benefiting from the weak pound, but the premium to the market was “pricing in too much future growth” amid slowing revpar trends that are expected to worsen.

Barclays also suggested the valuation is a bit toppy as it seems to ignore “the significant downside risks associated with a macro slowdown”, with hotels being a highly cyclical industry with any decline in revenue per available room tending to be significant.

The consensus forecast is for revenues of US$1bn underlying earnings (EBITA) of US$410mln.

IWG trying to be more like IHG

Shares in IWG PLC (LON:IWG), the former Regus, have been on a stormer this year, up 80% as investors like the sound of longtime boss Mark Dixon’s strategic pivot to make IWG more like IHG.

Dixon, the Essex-born and now Monaco-based businessman who founded the serviced office group in 1989, will have seen the results of IHG’s move to an asset-light business model and the stratospheric rise of office rival WeWork to a valuation of around US$50bn despite never having made a profit.

In April, IWG inked a strategic partnership in Japan which some analysts see as showing the sort of valuation the group’s assets will command from the pivot towards a franchise business model, selling for 3.4 times revenue, 3.3 times assets and 20 times EBITDA when IWG was trading on 1.4 time revenue, 1.6 times assets and 8.4 times EV/EBITDA.

IWG evolution will be benefits to financial leverage, return on capital, volatility and valuation multiples, Credit Suisse said in a note to clients at the time.

At the group’s subsequent first-quarter update, Dixon said "it’s our ability to engage with the level of interest” that is the constraining factor on the rate at which franchise agreements are signed, not the level of interest itself.

Yet with no more deals have been signed since the Japan agreement, broker Peel Hunt said if no further deals are announced in these interims, “given the confidence expressed in March, and the knowledge that the process started as early as November 2018, 3.5 months is a long time to wait.”

New head chef for Domino's Pizza?

Speculation that Domino’s Pizza Group PLC (LON:DOM) could soon appoint a new chief executive sent shares rising in recent months, though they are now back to where they started the year.

It has been rumoured that Andrew Rennie, the chief executive for Europe at Aussie-owned Domino’s Pizza Enterprises, will take over from David Wild as the London-listed firm’s new boss.

While Rennie is well thought of after opening his first franchised store in Darwin, City broker Liberum sees no quick fix for Domino’s in the UK.

For the half-year, Peel Hunt forecasts adjusted profit before tax down 7% to £42.5mln with UK profits up 6% but overseas losses also increasing and higher interest costs.

Tuesday August 6:

Interims: Genel Energy PLC (LON:GENL), Intercontinental Hotels PLC (LON:IHG), IWG PLC (LON:IWG), Rolls-Royce Holdings PLC (LON:RR.), Rotork PLC (LON:ROR), Synthomer PLC (LON:SYNT), TP ICAP PLC (LON:TCAP), Zotefoams Plc (LON:ZTF)

Economic data: UK retail sales

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