Why InterContinental Hotels’ valuations higher than peer average


Aug. 11 2014, Updated 5:00 p.m. ET

InterContinental’s valuations higher than peer average

InterContinental Hotels Group (IHG), the UK-based hotels group, has seen an activist push from Mick McGuire’s Marcato Capital Management. The San Francisco-based hedge fund is pressuring the hotels company to explore strategic alternatives, including a sale to a U.S. based hotels group. Marcato said it has hired Houlihan Lokey to conduct a strategic review of the company to explore ways to improve shareholder value. IHG said on its recent earnings call that it doesn’t comment on speculation.

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We compared InterContinental Hotels Group with its U.S.-based listed peers such as Wyndham Worldwide (WYN), Starwood Hotel & Resorts Worldwide (HOT), Marriott International (MAR), and Hyatt Hotels (H). IHG’s price to earnings (or P/E) multiple and enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) is higher than the peer average. Its profit and EBITDA margins are also above the U.S.-listed peers. IHG has noted that even its competitive landscape has evolved as “competitors are no longer simply branded or independent hotels, but now include travel intermediaries and companies offering alternative lodging solutions and search options, providing inspiration for travel ideas and aggregating a range of travel solutions.” These include companies such as AirBnb and Expedia (or EXPE).

IHG drives shareholder returns through special dividends and buybacks

IHG has been involved in asset disposals, and using the proceeds for dividends and buybacks. For the first half of 2014, IHG said it completed a $500 million share buyback program, and in July it paid out $750 million in special dividends, “continuing its long track record of returning funds to shareholders.” A special dividend of $2.93 per ADR was paid on July 14, 2014 to shareholders. The company increased its ordinary dividend by 9% to $0.70 last year, adding that this “reflects our confidence in our proven strategy to deliver high quality growth.” The board recently proposed an interim dividend per ordinary share of $0.25, representing a growth of 9% on the 2013 interim dividend.

Industry forecasts bullish

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The industry forecasts appear bullish with the June, 2014, edition of PKF Hospitality Research’s (or PKF-HR) “Hotel Horizons” national forecast report saying that “supply growth is expected to remain below the long-run average of 1.9% through 2016 before increasing to 2.1 % in 2017. PKF-HR expects this modest growth to keep occupancy strong and allow operators to increase average daily rates resulting in robust revenue per available room (or RevPAR) growth through 2016.” Smith Travel Research estimates total transaction volume to top $18 billion in 2014, and RevPAR growth of ~5.5%. An improving economy and an uptick in group room demand is driving positive forecasts for the industry.

Apart from macroeconomic factors that influence growth in the hotel industry, there’s also a change in technological trends and in consumer behavior. The traveler demographic has evolved, and the use of smartphones and tablets has increased to research, plan,and book travel. IHG’s 2014 Trends Report noted that “the rapid rise of technology-enabled personalization is helping to shape the experience guests want when they travel.” It also found that personalized brand experiences that resonate with the local culture are particularly important for the fast-growing number of international travelers from emerging markets.


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