Investment Thesis: While InterContinental Hotels Group (NYSE:IHG) has seen a significant rebound in revenue and cash flow to date, the combination of inflation and COVID lockdowns across China could place downward pressure on the stock in the short to medium term.
In a previous article back in October, I made the argument that InterContinental Hotels Group could see some upside going forward as net rooms growth in China rebounds. However, I also argued that the plateauing of growth across North America and EMEA would make the company increasingly dependent on Chinese growth going forward.
Since that article – the stock is down by just under 15%. This can be attributed to both a broader market downturn due to inflation concerns, as well as the effects of COVID-19 lockdowns in China affecting the hotel industry.
The purpose of this article is to assess whether InterContinental Hotels Group could see upside after the recent consolidation, or whether we could expect further downside ahead as a result of current macroeconomic pressures.
When looking at performance over the past three years – we can see that revenue in 2021 is still significantly below 2019 levels. However, what is encouraging is that we have been seeing net cash from operating activities as a percentage of overall revenue rising to above 20% – indicating that the company is seeing revenue rebound as well as showing growth in net cash which puts InterContinental Hotels Group in a better position to meet short-term debt obligations going forward:
|Net cash from operating activities||653||137||636|
|Net cash to total revenue ratio||14.11%||5.72%||21.88%|
Source: InterContinental Hotels Group Financial Statements and Notes to the Group Financial Statements. Net cash to total revenue ratio calculated by author.
When looking at revenue across geographies, we can see that Greater China revenue in 2021 approached 2019 levels once again – whereas that of the Americas and EMEAA remained significantly below pre-COVID levels:
Given the ongoing COVID-19 lockdowns in China, there is a risk that overall Greater China revenue for 2022 could see downside from that of the previous year – depending on the extent to which lockdowns continue.
While we could see a scenario where that of the Americas and EMEAA rebound towards pre-COVID levels – higher inflation rates along with numerous flight cancellations and delays as a result of staff shortages could mean a situation whereby potential travelers decide to postpone bookings further – which means that revenue figures remain low.
When looking at the company’s fee business by brand, we can see that the average daily rate, revenue per available room and occupancy are up strongly from that of last year across the Americas and EMEAA, while ADR growth for greater China was very modest with RevPAR and Occupancy seeing a decline:
Going forward, while there is still significant scope for recovery across these metrics for North America and Europe – I take the view that we are likely to see growth start to plateau – especially given broader macroeconomic concerns as a result of inflation.
From this standpoint, I take the view that investors are likely to judge the company in two key areas going forward:
1) The degree to which overall revenue can continue to rise given the effects of inflation and lockdowns in Greater China
2) Whether we can continue to see continuing cash growth in the case of rising revenue
To the second point, net cash from operating activities has rebounded to near pre-COVID levels since 2020. However, revenue growth still has yet to follow suit. Should we see a situation where cash as a proportion of revenue falls due to the company having to significantly increase expenditure to meet rising demand, then this could be a concern for investors going forward.
To conclude, InterContinental Hotels Group has seen a significant recovery in 2021, but the extent to which revenues and cash from operations can continue to climb in 2022 is more uncertain. That, coupled with ongoing bearish market sentiment, could mean that the stock sees downward pressure in the short to medium-term.
Additional disclosure: This article is written on an “as is” basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.