Morning Note: Market news and an update from hotel group IHG.

Market News

US equities were little changed last night – S&P 500 (-0.2%); Nasdaq (+0.3%) – as traders consider cooling expectations of Federal Reserve rate cuts for the rest of the year. Mary Daly said she expects the central bank will keep cutting rates to guard against labour market weakness, while Neel Kashkari, Lorie Logan and Jeffrey Schmid indicated favouring reductions at a slower pace. The 10-year Treasury yield is 4.22%, up over 50 basis points since just before the September rate cut. Gold remains well supported at $2,734 an ounce.

In Asia this morning, equities were mixed: Nikkei 225 (-1.4%); Hang Seng (-0.1%); Shanghai Composite (+0.5%). The FTSE 100 is currently trading 0.2% lower at 8,296. HSBC is little changed following the announcement of a simplified organisational structure. SAP is trading 5% higher after the company’s cloud revenue jumped 25% last quarter on AI offerings.

Megan Greene wrote in the FT that she favours a “cautious, gradual approach” to easing policy, noting both inflation risks and Britain’s lagging consumer spending recovery. Bank of England Governor Bailey is due to speak later today. The UK budget deficit excluding banking groups was £16.6bn in September. Sterling trades at $1.3011 and €1.2015.

Vladimir Putin will play host to the three-day BRICS summit which starts today in Kazan. Leaders of 32 countries as well as top officials of regional organisations and UN Sec-Gen Antonio Guterres will attend, the Kremlin said, signalling the Russian president is far from isolated.

Source: Bloomberg

Company News

InterContinental Hotels Group (IHG) has this morning released Q3 results which highlight an expected deceleration in room revenue compared to the first half. However, the group continued to expand its room count with another quarter of sequential improvement. Overall, the group is on track to meet full-year expectations. The share repurchase programme is ongoing, with the projection for year-end financial gearing implying further buybacks to come. The shares have been a good performer this year and have been marked down 2% in early trading this morning.

IHG owns a portfolio of 19 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. At the end of September 2024, the global estate was 968k rooms across 6,505 hotels, with 66% in midscale segments and 34% in upscale and luxury. Gross revenue generated by the group’s hotels is more than $31bn.

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. Earlier in the year, the group set out a financial framework for the medium to long term, targetting:

·       high single digit percentage growth (i.e. 7%-9%) in fee revenue, though combination of RevPAR and system size growth, together with 100‑150bps fee margin expansion, annually on average.

·       100% conversion of adjusted earnings into adjusted free cash flow, supporting investment in the business to optimise growth, sustainably growing the ordinary dividend and returning surplus capital.

·       12-15% adjusted EPS compound annual growth rate, including the assumption of ongoing share buybacks.

During the latest quarter, global revenue per available room (RevPAR) – the key measure of industry performance – grew by 1.5%. As expected, this was slower than the first half (+3.0%) and leaves the year-to-date growth at 2.4%, on track to meet the 2.6% expectation of a company compiled consensus. The guest appeal of the group’s brands has continued to support pricing, with average daily rate up 1.7%, although occupancy slipped by 0.1 percentage points.

There is still a wide regional variation across the business. In Americas (the group’s largest division), RevPAR grew by 1.7%, with continued growth in the US (+1.2%). The EMEAA region 4.9%, within which the Middle East fell 3.2%. In Greater China, RevPAR fell by 10.3%, as the group came up against unusually strong comparatives of resurgent domestic travel this time last year – Q3 2023 was up 43%. The quarter was still broadly in line with 2019 levels and the group remains very encouraged by the longer-term demand drivers for the region.

By revenue type, IHG saw Groups demand up 6% (in a record period), Business up 2%, and Leisure broadly flat on same quarter last year.

IHG continued to open new hotels and sign rooms more into its pipeline as it benefits from a ‘survival of the fittest’ bias as many smaller competitors exit the market. During the third quarter, 17.5k rooms across 98 hotels were opened. Gross system size grew by 5.9% year-on-year, while after removals, net system size growth was 4.1% year-on-year. This was another quarter of sequential improvement and very significantly ahead of last year. Conversions from other brands accounted for 50% of openings, a big positive given the time to open is much shorter than with a new build. The group has also seen the advance in new-build signings over the course of the year as developer confidence continued to improve.

IHG signed 19.2k rooms (129 hotels) in Q3, up 14%, boosted by deals with Iberostar and NOVUM (see below). This leaves a global pipeline of 327k rooms (2,218 hotels), up 12% year-on-year, and 34% of the current system size, providing good growth visibility.

Earlier in the year, the group signed a long-term agreement with NOVUM Hospitality that will double its presence in Germany to more than 200 hotels in almost 100 cities. Conversion of the hotels to IHG’s system (as Holiday Inn, Garner, or Candlewood brands) will happen in phases beginning this year, with the majority to take place over the next 24 months. This will increase IHG’s global system size by up to 1.9% over the coming years, although the impact on fee growth will be lower.

IHG’s license agreement to affiliate The Venetian Resort Las Vegas and The Palazzo at The Venetian Resort with the InterContinental Hotels & Resorts brand will come to an end on 1 January 2025 after 15 years. Although the end of this agreement will remove 7,092 rooms (0.7%) from IHG’s overall system size in 2025, the unique nature of the fee structure under this particular licensing agreement means it contributed less than 0.1% of IHG’s revenue from fee business in 2023 and a net nil contribution to operating profit from reportable segments.

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. At the last balance sheet date (30 June 2024), gearing was 2.4x 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 – 77% of the current $800m programme (3.7% of market cap.) has been undertaken, with the programme expected to complete this year. This will still leave end-2024 gearing at the bottom end of the target range, leaving the group well placed to announce further buybacks with the full-year results in February.

Overall, the company remains confident in the strengths of its business model, scale, and in its strategic priorities to capture sustainable, profitable growth.

Source: Bloomberg