Should you check in to Intercontinental Hotels?
The Intercontinental Hotels Group (IHG) Q3 results looked impressive. But on fuller consideration, I do not regard these shares as ones to buy despite the interesting share price chart and impressive Q3 results. They look dear on most valuation yardsticks. Nor would I wish to continue to hold them as we approach the long awaited end to US quantitative easing.
A 6.9% jump in a share price in one day speaks either of a takeover, or a market imperfection, undreamt of by economists (who invented the notion of the perfect market) and business school graduates (who know it as the ‘efficient market’). Either way, it implausibly suggests that the share price reflects all that there is to be known in the public domain. In the case of Intercontinental Hotels Group, the last third quarter results speak more of an imperfect market understanding of how well the hotel company is doing. At least I think so! The problem being, that the statement from this group is hardly written in standard English. I have noticed recently that some company reports are so badly written that they amount to little more than jargonizing for the intimate few (analysts and fund managers) and not for communication with the many (you and me: the great unwashed investing public).
A few lessons on communication in standard English would be a welcome and useful improvement generally. I do not know, as a matter of personal education, what RevPAR is! However, it seems to be doing well at Intercontinental Hotels where it was reported to have risen 4.8% in the last quarter. Too late in the day to telephone to ask the company I assume, reasonably enough, that it means revenue per available room; which, as I say, sounds very good, particularly when, as reported, 3.6% of the 4.8% came from increased prices. After years of quantitative easing, price inflation seems to be returning to the intercontinental hotel business. In our world of low inflation that sounds like a good deed.
Moreover, there is more good news – if my interpretation of it is a reasonable interpretation of what is stated. That is to say, the number of hotel rooms have risen by 4.35% year on year, to a total of 727,000 rooms with a ‘pipeline’ (a funny way of talking about rooms in my opinion) of 218,000 rooms; that latter figure representing a near 30% of the foregoing figure and a highly encouraging prospect if everything proceeds without recession. With room rates rising at 3.6% that does not seem a probable prospect.
In its linguistically obscure way, the third quarter report also seems to say that the hotel brands of Group hotels are flourishing. Particularly, the Holiday Inn Brand, where the number of hotels under that banner are the highest they have ever been.
Another bullish event was the report that the Hong Kong Hotel has been sold for a cool $929 million. I have not seen the analytical details of this sale in terms of other hotel asset sales, but it sounds a lot. Nearly one billion dollars may indeed be a tribute to quantitative easing being alive and well.
It is also evidence of two other things: the buoyancy of the international hotel business as well as the fact that the group presumably has a good handle on providing hotel facilities for the Chinese traveller and hotel user. This is something which looks as though it will hold the Intercontinental Hotel Group in good stead, as China’s consumers spend more time abroad; perhaps including London after the pageantry of Chairman Xi’s visit.
The technical position of the Intercontinental Hotels Group share price patterns looks very attractive. Very simply, the share price has been in decline since the last April high of 2,967p. Last seen, the price after the 3rd quarter bounce was still only 2,471p – sixteen per cent down from the April high. As a result of that bounce, the share price has clearly broken out of the April to October downtrend of the shares. Moreover, on a three year chart, the shares have bounced off what I read as a long term support level. As I always say, chart reading always has a subjective component, so have a look for yourself!
However, I see that the company seems to have now completely changed its business model, having sold off the Hong Kong Hotel – reportedly the last of it hotel assets – and is now a fee earning business, from which I suppose it to be the franchise owner of a franchise business. Is this a case of canny players selling assets at what they may perceive to be – rightly or wrongly – the top of the QE driven cycle? That would also present valuation problems.
The consensus market estimates are for a 10% increase in earnings this year and 12 % next year to 112.7p a share and 126.7p a share, valuing these shares at a share price of 2,471p on an estimated price to earnings multiple of over 20 times for this year and 18 times for next year. Presumably, those consensus earnings will be upgraded as a consequence of the Q3 results just published – but will that be enough to make the shares look anything like cheap against these valuations after the near seven per cent rise in the share price? Despite the share price charts, I find it difficult on more fundamental grounds to take a bullish interpretation of the chart face value.
The thing that I find unattractive in the last published accounts is the absence of shareholder assets. They show negative values on both total book value terms and in net tangible asset terms. The last annual, balance sheet showed the cost of dividends paid as $942 million but covered by operating cash of only $543 million. Moreover, cash in the June 30th balance sheet is only $99 million. None of this looks like strong cash support for that dividend payout.
I had hoped to find this share an attractive one because of the chart position. The more I looked at the fundamentals the more I was persuaded that this is probably a share that will do poorly in a time of the tapering of quantitative easing, even if it does start gently.