Market news and results from IHG and Glencore

Market News

China’s exports fell for a third straight month in July thanks to slower global demand, while imports plunged 12.4%. The data point to intensifying pressure on both the external and domestic fronts, Bloomberg Economics said. Investors will be looking for more announcements of government stimulus, though that may have to wait until tomorrow’s CPI and PPI data to confirm the trend. Without that follow-through, Bloomberg Economics said weakness in the second half may sink prospects for achieving this year’s 5% growth target.

Chinese stocks moved lower – Hang Seng (-1.9%); Shanghai Composite (-0.3%) – after the trade data, while Japan edged higher (Nikkei 225, +0.4%). US futures are currently predicting a 0.3% decline at the open this afternoon. The FTSE 100 is currently trading 0.2% lower at 7,546.

The Bank of England warned that prices in UK supermarkets may never fall back from their painfully high levels. Chief economist Huw Pill predicted that while “substantial” declines on global food markets will eventually feed through to shoppers, it may only slow the pace of increases in grocery bills rather than lead to an outright drop. Meanwhile, retail sales rose 1.5% year on year in July, according to BRC and KPMG. Sterling trades at $1.2746 and €1.1612.

Brent Crude trades at $85.50 a barrel. The US started refilling the Strategic Petroleum Reserve, which had fallen to the lowest in four decades. Total inventory rose by 1m barrels to 347.8m as of 4 August.

Source: Bloomberg

Company News

InterContinental Hotels Group has this morning released its first-half results which highlight strong trading across its business. The shares currently trade at a valuation discount to the peer group (Marriot and Hilton) and are up 2% in early trading.

IHG owns a portfolio of 18 attractive brands across all price tiers (including Crowne Plaza, InterContinental, Holiday Inn, and Six Senses) and has a strong operating system, both of which drive customer loyalty and pricing power. The group operates a highly scalable, asset-light model, based on franchising and management contracts, with low capital intensity and high returns. The model also means the group doesn’t bear the operational costs of running a hotel. The company is focused on delivering industry-leading net rooms growth over the medium term. It currently has a 4% global market share and a 10% share of the new room pipeline.

Long-term growth is being driven by a rising global middle class with a desire to travel. In the business market, IHG’s weighting is towards essential travel and non-urban markets.

On 1 July, the new CEO took up his position. Given that he led up the group’s Americas business for the past eight years, we expect little change to the current strategy.

During the six months to 30 June, revenue was $1,031m, up 27% in underlying terms. Operating profit grew by 30% in underlying terms to $479m, better than the market forecast of $450m. Fee margins continued to recover strongly from 55.5% to 58.8% and are now well ahead of the pre-Covid level of 53.7% (H1 2019). Adjusted EPS grew by 50% to 182.7c.

Global revenue per available room (RevPAR) – the key measure of industry performance – grew by 24%, with Q2 (+17%) slowing versus Q1 (+33%) as the group faces increasingly tough year-on-year comparatives. Leisure demand remained buoyant, while business and group travel has continued to strengthen. The guest appeal of the group’s brands has continued to support pricing, with average daily rate up 7% year-on-year. Occupancy rose by nine percentage points. RevPAR is now 8.9% above the 2019 pre-pandemic level, with occupancy only 1.3 percentage points below and average daily rate 11% higher.

There is still a wide regional variation across the business. In Americas (the group’s largest division), RevPAR was up 11.2% and was 11.8% ahead of 2019. The EMEAA region grew by 41.6% and was 12.5% above 2019. In Greater China, RevPAR bounced by 93.7% following the lifting of travel restrictions but was still down 3.8% vs. 2019.

IHG continued to open new hotels and sign more into its pipeline. During the first half, 20,995 rooms across 108 hotels were opened, 40% more than in H1 2022. The removal rate of 1.5% was in line with the historical underlying average rate. Gross system size grew by 6.3% year-on-year, while net system size growth was up 4.8%. Conversions from other brands increased to be over a third of both openings and signings in the period. This is positive as the time to open is much shorter than with a new build. The group ended the half-year with 925,320 rooms across 6,227 hotels, 68% in midscale segments and 32% in upscale and luxury.

IHG signed 34,167 rooms (239 hotels) in H1, up 11%, to give a global pipeline of 286,228 rooms (1,931 hotels), up 2.9% year-on-year. More than a quarter of signings were across the six Luxury & Lifestyle brands, as the group accelerates growth in this higher fee income segment.

Today, IHG has announced it will soon launch a new brand targeted at midscale conversion opportunities, a space worth $14bn in the US market alone. The group has already had strong interest from owners, with more than 100 hotels expressing definitive interest in the new brand as they seek to quickly realise the benefits of IHG’s scale and strong enterprise.

The asset-light model means IHG has low investment requirements and a negative working capital cycle. The group operates a conservatively leveraged business model and maintains strong liquidity. During the first half, the group generated adjusted free cash flow of $277m, almost double last year. Net debt rose from $1.7bn to $2.3bn, mainly due to share buybacks, with gearing of 2.3x net debt to EBITDA, below the bottom end of its 2.5x-3.0x target range.

In response, the group is returning surplus capital through share buybacks. The current $750m programme (c. 6% of market cap.) is 47% complete and is expected to end no later than 29 December. At that point, gearing is still expected to be below target, potentially providing scope for additional returns. In addition, the half-year dividend was raised by 10% to 48.3c.

While the group doesn’t provide full-year guidance as such, the statement does include some commentary. There have been no broad signs of consumer price resistance or cooling of leisure demand to date. Some specific US resort destinations that had already experienced very strong demand-driven pricing last year have seen rates ease, with this offset by increased leisure travel to other destinations, including international trips to locations where IHG’s global distribution reach has captured strong demand. The expected recovery in business demand has continued, with progress in the US indicating the potential elsewhere. Corporate rate negotiations in 2022 have supported rate increases in 2023.

Whilst comparatives to 2022 get tougher from the second quarter onwards and there are ongoing economic uncertainties, the group expects RevPAR to remain positive year-on-year in each region. IHG has continued to prove the resiliency of its business model and management remain confident about the strong tailwinds for attractive long-term, sustainable growth and value creation.

The group has previously admitted that the pandemic may lead to some structural changes for the industry, such as an element of technology replacing certain kinds of business travel. However, IHG is already seeing clear signs of business demand returning. There will also be other trends, including a greater use of hotels to facilitate a global shift to increasingly flexible working arrangements. This further supports a view that overall demand levels could be little changed.

IHG therefore anticipates the attractive industry fundamentals will be fully restored in the longer term. Furthermore, with its scale and strong brands, the group should also benefit from a ‘survival of the fittest’ bias as many smaller competitors exit the market.

Source: Bloomberg

Glencore has this morning released its half-year results. As expected, earnings fell sharply on the back of lower commodity prices. In response, the shares are down 3% in early trading and still trade at a discount to the peer group.

Glencore is a vertically integrated commodities business, with a strong position in the production of copper, thermal coal, nickel, zinc, cobalt, and precious metals, and a unique marketing business which markets and distributes commodities sourced from internal production and third-party producers to industrial consumers. The group’s strategy is to own large-scale, long-life, low-cost Tier 1 assets. Glencore is a leading producer of metals that are used in low-carbon and carbon-neutral technologies, such as electric vehicles and renewable energy, the outlook for which is underpinned by robust demand and persistent long-term supply challenges. The IEA estimates that by 2050 the metals requirement for clean energy technologies will amount to 2.1x-3.4x more copper than in 2020, 10.8x-30.1x more nickel, and 9.9x-32.9x more cobalt. Given the industry’s supply constraints, the group is also increasing its investment in recycling and circularity.

Earlier in the year, Glencore announced plans to merge with Teck, one of Canada’s leading mining companies with operations throughout the Americas focused on copper, zinc, and steelmaking coal. The move would see the creation of two separate companies – MetalsCo and CoalCo – and generate substantial synergies. Although Glencore is still willing to pursue the deal, more recently, and following local opposition to the deal, Glencore has submitted an alternative bid to acquire Teck’s steelmaking coal business (EVR) for cash. Glencore’s intention is still to demerge CoalCo, but this would be done within 12-24 months of deal completion to enable the balance sheet to sufficiently deleverage.

During the six months to 30 June, adjusted profit (EBITDA) fell by 50% to $9.4bn, reflecting the normalisation of primarily energy market imbalances and volatility from the extreme levels seen in 2022.

The Industrial assets’ EBITDA fell by 52% to $7.4bn, impacted primarily by lower pricing, particularly in coal, as well as inflationary cost impacts across the asset base, much of it having lagged and been heavily influenced by the surge in energy prices during 2022. The group enjoyed a solid first-half production performance from its underlying base business, with the key copper, coal, and zinc assets performing in line with expectations and previously communicated guidance. Pricing was as follows: Newcastle grade thermal coal (-36%), copper (-11%), zinc (-26%), and nickel (-13%). Safe haven commodities such as gold rose by 3%. The company highlights cost headwinds are now moderating.

Glencore’s marketing business exploits arbitrage opportunities that continuously emerge in commodity markets. It provides a good hedge against commodity price volatility and finances the $1bn base dividend (see below), although clearly there is always a risk of potential losses because of that volatility. Progressively through the first half of 2023, the particularly elevated commodity market imbalances and volatility levels that prevailed through much of 2022, have largely normalised, which, while clearly impacting profitability, has allowed for the release of some of the investment made in non-RMI marketing working capital in 2022. In the first half, the unit generated adjusted profit (EBIT) of $1.8bn, down 52% from last year’s exceptionally strong performance, but tracking above the $2.2bn-$3.2bn p.a. long-term guidance range. For this year the group is guiding to $3.5bn-$4.0bn.

Viterra is the group’s agricultural commodity trader, in which it has a 49.5% stake. In June, the company announced the merger of Viterra and Bunge to create a diversified global agribusiness solutions company. The new combination is well placed to meet increased global demand as well as the ongoing challenge of providing sustainable, traceable food and feed products to customers around the world. The implied valuation of Viterra under the merger is $8.1bn or 3.1x EBITDA. Under the terms of the agreement, Glencore will receive 32.8m Bunge shares (or 15% of the new company), currently worth c. $3.8bn (vs. $3.1bn at the time of the deal), and $1bn in cash. The transaction, which is expected to close in mid-2024, will result in a larger, more diversified business, with significant synergy and re-rating potential. Glencore plans to apply the cash proceeds to repay existing borrowings.

In the first half, capital expenditure grew by 21% to $2.5bn. Guidance for the next three years is an average of $5.6bn p.a. The company is looking at greenfield mine developments, although these projects will only be approved when the market requires the commodity (and prices are higher) or when existing projects are completed.

Funds from operations were $3.7bn. Associated with a return to more normal commodity markets and volatility levels, investment in net working capital was partly released. Net borrowing ended the half-year at $1.5bn, well below the group’s $10bn optimal level.

A strong balance sheet and free cash flow generation leaves the company well placed to pay out significant shareholder returns. The dividend policy is to pay a fixed $1bn base distribution from the Marketing business, reflecting the resilience, predictability, and stability of the unit’s cash flows, plus a minimum payout of 25% of Industrial free cash flow. Where net debt falls below the $10bn cap (after the base distribution), cash will be periodically returned to shareholders via special cash distributions and/or share buybacks as appropriate.

Today, after consideration of near-term cash commitments and potential M&A, the group has announced an additional “top-up” payment of $2.2bn which will be undertaken by way of a $1bn (8c/share) special cash distribution and a new $1.2bn share buyback programme intended to run until 2024. The special cash distribution of 8c will be paid alongside the 22c/share second tranche of the cash distribution announced last February. This takes the total distribution this year to $9.3bn or 16.6% of the market cap.

In its outlook statement, the company highlights moderating inflation and supportive government policy in China across key end-user sectors are bringing a more positive macroeconomic backdrop in H2 2023. Low metal inventories, higher production costs, geopolitical uncertainty and energy transition demand are all supportive of above-average real-term prices through the cycle and into the longer term.

As usual, the group provides an illustrative mark-to-market profit and cash flow at current spot prices.

The estimate for 2023 – EBITDA ($17.4bn, down from $22.6bn previously) and free cash flow ($7.3bn, vs. $10.6bn previously) – has been reduced because of the fall in commodity prices. However, this still equates to a free cash flow yield of 10% and provides potential for further shareholder returns, depending on M&A outcomes.

Source: Bloomberg