Features | Sectors | 3 Mins Read | by
Franchising offers the upside of business success and avoids much of the downside risk. InterContinental Hotels (IHG) is one of the world's leading hotel franchisors.
In last month's Master Investor I covered: Restaurant Franchisors: McDonald's & Domino's Pizza. In this month's issue I look at hotel franchisors with a particular focus on InterContinental Hotels.
The UK's largest master franchisor
InterContinental Hotels Group is the UK's largest master franchisor with a market value of £9.1 billion. The group's main brands include InterContinental Hotels, Crowne Plaza and Holiday Inn.
IHG came into being in March 2003 when Six Continents plc split itself in two. The retail business was named Mitchells & Butlers and trades on the stock exchange today.
Shares in Mitchells & Butlers started trading in 2003 at around 225p and currently trade at 380p. Shares in IHG started trading at around £5 and currently trade at around £50.
IHG has clearly been the better investment. The hotel sector is subject to growing demand and there are barriers to entry in city centres. Franchising is also a relatively low risk business model.
The hotel sector is cyclical with occupancy and room rates both driven by economic growth. Hotel franchisors are not immune, which explains the weakness in IHG's share price in recent weeks.
Taking the closing price on 1 October of £50.3 the valuation ratios are below. IHG's financial year follows the normal calendar year.
The current forecast P/E rating is 20.1X for 2019, 18.7X for 2020 and 17.2X for 2021. The forecast free cash flow yield is 4.7%, 5.5% and 6% respectively.
Whether earnings forecasts will be hit is hard to say. IHG's main market is the United States and the group also has a growing position in China.
The US and Chinese economies are currently expected to slow down in part due to the ongoing trade war. Business and leisure travel tends to be cut back in a downturn.
IHG is a high margin business with the forecast EBIT margin 40.7% in 2019. Interest cover is forecast to be 5.4X in 2019 with the net debt to EBITDA ratio 2.5X.
IHG forecasts at a £50.3 share price
Other hotel franchisors
Most of the other companies in the hotel sector have turned to franchising.
It is interesting to note that Marriott is held by the Fundsmith Sustainable Equity Fund. Wyndham Hotels is held by the Blue Whale Growth fund.
IHG benefits from having the leading luxury brand and the leading position in mainstream hotels with the Holiday Inn brand. The company was also a first mover in China.
Marriott appears to be an attractive business but is less focused with 30 hotel brands. Wyndham Hotels addresses the mainstream market segment but is not the market leader.
IHG appears to be one of the highest quality businesses listed in London.
IHG has become less cyclical due to the sale of hotels since the group listed in 2003. This reduces the fixed cost and operating leverage in the business.
The company also appears to be at the forefront of industry innovation with new brands like EVEN Hotels. The threat from the likes of Airbnb and online travel agents also appears to be overstated.