The FTSE100’s InterContinental Hotels Group (LSE: IHG) share price has been trending higher and the company posted a strong trading update on 20 October.
The hotel sector around the world is booming. Who’d have thought it given all the well-reported economic and geo-political troubles of the past few years? Not me.
Strong demand
But demand from businesses and for leisure is robust. And IHG’s positive third-quarter update follows recent good news from hotel operator Whitbread.
We can get a feel for how well IHG’s business has been performing by looking at its stock chart. There’s a strong recovery and growth since the pandemic. And that’s set within a much longer period of progress since around 2009.
However, despite the gain already seen from the stock, I think there’s likely to be more to come over the next few years.
A shrewd set-up
One of the great strengths of the enterprise is its asset-light business model.
In 2022, around 71% of available rooms worldwide were franchised. And with the franchise model, IHG licenses one of its several brands to the hotel owner and takes a royalty fee of around 5-6% of the revenue generated by the hotel.
That’s so clever. There’s no mention of profits in that business model. IHG’s Income is assured because of economic activity. And it’s up to the hotel owner to do all the running around to turn a profit. But it gets its cut regardless.
IHG also operates around 28% of its rooms via a managed hotels business model. But, once again, the hotel properties are not owned by IHG. So the company retains the advantages of an asset-light setup.
Finally, just around 1% of IHG’s rooms fall within an owned, leased, or managed leased business model.
Chief executive Elie Maalouf said travel demand was “very healthy” during the third quarter of 2023. Revenue per available room increased by 10% year on year. And it was up in the period by 13% compared to pre-pandemic 2019.
An agenda for growth
The company opened nearly 8,000 rooms across 50 hotels in the quarter, and added 17,000 rooms to its pipeline. It seems ongoing growth is on the agenda, continuing an upwards trajectory that’s been building over decades now.
Looking ahead, Maalouf expects the business to end 2023 with “very strong financial performance”. And beyond this year, he’s “confident” in the strengths of IHG’s business model, scale and its strategic priorities to capture sustainable, profitable growth.
However, despite the positive outlook, there is some valuation risk here. With the share price near 5,966p, the forward-looking earnings multiple is around 18 for 2024. And City analysts expect earnings to advance by about 11% that year.
That’s quite pricey, despite the firm’s reputation for steady growth. After all, the hotel sector is cyclical. And it’s always possible to see another downturn, such as those around 2009 and 2020.
Nevertheless, I see IHG as a contender for inclusion in a long-term diversified portfolio and would be keen to dig in with deeper research now.
