Morning Note: Market News and strong results from IHG Group.

Market News

Top US and Russian diplomats are in Saudi Arabia for negotiations to end the war in Ukraine, though the talks are bilateral and don’t include Kyiv, the AP reported. Emmanuel Macron spoke separately with Donald Trump and Volodymyr Zelenskiy on aligning with the US on peace talks. Discussions are underway in the EU about increasing defence spending, with joint financing being considered as a realistic option by a growing number of leaders. Taiwan is considering buying arms worth up to $10bn from the US.

Treasury yields edged higher – the 10-year is 4.52% – as cash trading got underway in Asia after the US holiday. The Fed’s Christopher Waller said recent data supports keeping rates on hold, but cuts may resume later this year if inflation behaves as it did in 2024. Gold ticked higher to $2,910 an ounce. Goldman raised its year-end target to $3,100.

In Asia this morning, Chinese stocks in Hong Kong climbed on optimism Xi Jinping’s embrace of tech leaders may give the private sector a freer hand with the US trade war. The Nikkei 225 rose slightly (+0.3%).

The FTSE 100 is currently little changed at 8,768. The pound trades at $1.2615 and €1.2040 after UK unemployment missed expectations, although wage growth excluding bonuses met estimates. 10-year Gilts yield 4.56%.

Brent Crude trades at $75 a barrel. Hedge funds are reducing bullish bets, with prices expected to stay between $70-$80 for most of 2025. BHP’s first-half profit slumped 23% from the prior year, missing estimates.

Source: Bloomberg

Company News

InterContinental Hotels Group (IHG) has released its 2024 results which highlight a strong finish to the year, particularly in the US, and reiterated its medium-term guidance. With financial gearing below target, the group has announced another share buyback programme and the acquisition of premium urban lifestyle brand Ruby. The shares have been a strong performer over the long-term and have seen a little profit taking in early trading this morning.

IHG owns a portfolio of 20 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 December 2024, the global estate was 987,125 rooms across 6,629 hotels, with 67% in midscale segments and 33% in upscale and luxury. Gross revenue generated by the group’s hotels is more than $33bn.

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. Last 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. This excludes the margin impact of the new credit card deal (see below).

• 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.

In 2024, revenue grew by 7% in underlying terms to $2,312m, in line with the consensus forecast. Operating profit grew by 12% in underlying terms to $1,124m, a touch ahead of the market expectation of $1,119m and including a $16m adverse currency impact. Fee margins were up 190 percentage points to 61.2%, better than the group’s framework target and driven by strong trading together with new and growing ancillary fee streams. Adjusted EPS grew by 15% to 432.4c, at the top-end of its financial framework, while the dividend was raised by 10% to 167.6c.

Global revenue per available room (RevPAR) – the key measure of industry performance – grew by 3.0%. This was better than the 2.6% expectation and driven by an acceleration in the final quarter (+4.6%), particularly in the US. The guest appeal of the group’s brands has continued to support pricing, with average daily rate up 2.1%. Occupancy rose by 0.6 percentage points to 67.9%.

There is still a wide regional variation across the business. In Americas (the group’s largest division), RevPAR was up 2.5% in the year and by 4.6% in Q4. The EMEAA region grew by 6.6% and 6.9% in Q4. In Greater China, RevPAR fell by 4.8% and by 2.8% in Q4.

During the year, the group 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 (now with 150m members), 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.

In November, IHG entered into a new agreement with its current issuing and financial services partner JP Morgan Chase to continue providing co-branded IHG One Rewards credit cards in the US. Total fees to IHG are expected to significantly increase over the term to 2036. From 2023 base of $39m, they are expected to double in 2025 and to more than triple by 2028, and with continued growth anticipated in the years beyond. As part of the new agreements, upfront cash inflows totalling $137m, pre-tax, are expected to be received over the coming months as part of IHG’s cash flow and will be recognised within fee income over the term of the new agreements.

IHG continued to open new hotels and sign more rooms into its pipeline. During the year, 59,117 rooms across 371 hotels were opened. Gross system size grew by 6.2% year-on-year, while after removals, net system size growth was 4.3% year-on-year. Conversions from other brands rose by 88% and 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 106,242 rooms (714 hotels) in the year, up 34%, boosted by the deal with NOVUM (see below). This leaves a global pipeline of 325,252 rooms (2,210 hotels), up 10% year-on-year, and 33% of the current system size, providing good growth visibility.

During 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, with the majority to take place this year.

This morning, the company has announced the acquisition of Ruby, a premium urban lifestyle brand in must-visit city destinations, for an initial purchase consideration of €110m. The so-called ‘urban micro’ segment is a franchise-friendly model with attractive owner economics. From a strong European base, the aim is to expand to the Americas and across Asia. Including one-time costs, in 2026 a broadly breakeven contribution to IHGs operating profit is anticipated, with growth in profitability forecasted thereafter.

The asset-light model means IHG has low investment requirements and a negative working capital cycle. In 2024, the group generated adjusted free cash flow down from $837m to $655m (94% conversion), as a result of planned higher spend in the System Fund. The group operates a conservatively leveraged business model and maintains strong liquidity, ending the year with net debt up 22% at $2.8bn, although gearing of 2.3x EBITDA is still well below its 2.5x-3.0x target range.

In response, the group is returning surplus capital through share buybacks – an $800m programme was completed in 2024 and with today’s results the group has announced a new $900m programme.

On a prospective basis, given analyst consensus expectations for growth in EBITDA and cash generation in 2025, together with the new buyback and the Ruby acquisition, leverage is still expected to end 2025 at the lower end of the target range of 2.5-3.0x.

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