Morning Note: Market news and an update from IHG.

Market News

Global stock markets remain volatile. At their worst, US Small Cap and Nasdaq were down 6%, before dip buyers stepped in mid-morning (S&P 500, -3.0% and Nasdaq -3.4%). Markets are currently expected to recover further at the open this afternoon. Huge volumes have been largely ETF driven with SPY trading double 5-day averages. The Mag 7 is down a stunning $3 trillion from their record highs.

While the Fed was expected to cut rates by 25bps at the September meeting, fed fund futures are now pricing an 84% chance of an additional 25bps cut by then. Mary Daly said the labour market, while still reasonably solid, is softening and indicated the Fed should begin cutting rates. The 10-year Treasury yield bounced off its lows and currently sits at 3.87%. The 2yr/10yr yield curve briefly dis-inverted for the first time since June 2022.

In Asia this morning, Japanese stocks rebounded about 10%, leading gains in Asia that offered some relief from a global rout. The yen weakened to 146 against the dollar, snapping a five-day rally. Japan’s MOF, BOJ, and FSA officials will hold a three-way meeting from 3pm local time to discuss financial markets. The FTSE 100 is currently trading 0.3% higher at 8,031. UK Chancellor Rachel Reeves declined to rule out increasing the capital gains tax after warning that difficult decisions will be taken to fill a £22bn budget black hole. Sterling trades at $1.2751 and €1.1659.

Gold trades at $2,406 an ounce, while Brent Crude is $76.50 a barrel. Crude risks a demand slump in the second half, which may drag WTI prices down to $70 a barrel, Bloomberg Intelligence said. Goldman sees a floor for Brent at $75, and it warned that risks to the downside will increase next year.

Google’s payments to make its search engine the default on smartphones and web browsers violates antitrust law, a judge ruled. The proceedings will now enter a second phase in which the court will decide what remedies or financial penalties the company will face. Google will appeal against the ruling. This is one of a number of lawsuits that have been filed against Big Tech, including Apple, Meta, and Amazon.

Source: Bloomberg

Company News

InterContinental Hotels Group (IHG) has this morning released first-half results which highlight an acceleration of growth in the latest quarter, reflecting a rebound in the US in Q2, albeit China struggled. The margin performance was strong and the share buyback programme is on track. The shares have been marked up by 3% 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 June 2024, the global estate was 955k rooms across 6,430 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 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 six months to 30 June, revenue was $1,108m, up 8% in underlying terms, in line with market expectations. Operating profit grew by 12% in underlying terms to $535m, above the market forecast of $525m, and included a $10m adverse currency impact. Fee margins rose by 180 basis points to 60.6%, driven by trading performance and new revenue from sale of loyalty points. The group has previously said that fee margins can continue to expand (by 100-150 bps p.a.) as the rest of the world catches up with the 80% margin achieved in the US. Adjusted EPS grew by 12% to 203.9c.

Global revenue per available room (RevPAR) – the key measure of industry performance – grew by 3.0%, with Q2 (+3.2%) as expected outpacing Q1 (+2.6%). The guest appeal of the group’s brands has continued to support pricing, with average daily rate up 2.0%. Occupancy rose by 0.6 percentage points to 66.6%.

There is still a wide regional variation across the business. In Americas (the group’s largest division), RevPAR bounced back in the second quarter (+3.3%) to give half-year growth of 1.7%. The US was positive from April and grew by 2.5% in Q2. The EMEAA region bounced by 7.5%, with particular strength in Japan. In Greater China, RevPAR fell by 2.6%, driven by a 7% decline in Q2 as comparatives became sequentially tougher due to timing of resurgent domestic demand last year after the lifting of travel restrictions.

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 first half, 18k rooms across 126 hotels were opened. Gross system size grew by 4.9% year-on-year, while after removals, net system size growth was 3.2% year-on-year. Conversions from other brands accounted for 41% of openings, a big positive given the time to open is much shorter than with a new build.

IHG signed 57k rooms (384 hotels) in the half-year, up 67%, or 15% excluding new deals with Iberostar and NOVUM (see below). This leaves a global pipeline of 330k rooms (2,225 hotels), up 15% year-on-year, and 35% 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.

The group has also made changes to its System Fund arrangements, improving hotel owner economics and growing IHG’s high margin ancillary fee streams. Given the highly successful growth and development of the IHG One Rewards loyalty programme, IHG has established new terms that govern assessment fees that owners pay into the System Fund and the sharing arrangements for ancillary fee streams such as those related to the sale of loyalty points. The company has stressed the change won’t lead to a reduction in the level of marketing financed by the System Fund and that it will be cash flow accretive. The change will boost operating profit by £25m in 2024 and £25m in 2025.

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 $132m. This was down 52%, driven by planned reduction of the prior System Fund surplus. Net debt rose from $2.3bn to $2.8bn, mainly due to share buybacks, with gearing of 2.4x net debt to EBITDA, just below the bottom end of its 2.5x-3.0x target range.

In response, the group is returning surplus capital through share buybacks – 47% of the current $800m programme (5% of market cap.) had been acquired by 30 June, with the programme expected to complete this year. This will still leave end-2024 gearing at the bottom end of the target range. In addition, the half-year dividend has been raised by 10% to 52.3c.

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