Intercontinental Hotels' decision to sell most of its hotel properties has been very successful, but is all the good news already in the share price?
InterContinental Hotels
(LSE: IHG)
is coming to the end of an epic asset sale. It's sold 175 hotels, raising £3bn, and has returned £2.57bn to shareholders so far.
You might think that means InterContinental no longer has much of a business, but you'd be wrong. It still owns valuable brands such as Holiday Inn, InterContinental, and CrownePlaza, and it's now concentrating on a large franchise operation as well as managing hotels for other owners.
The sale has been a shrewd move. InterContinental has sold when property values are high, and looks set to generate significant returns from a smaller capital base. What's more, the company argues the new approach will mean revenues are less volatile.
The new hotel owners need InterContinental because they're more likely to make money if they can use one of the company's brands. InterContinental also has its own reservations systems, which now generate 48% of total room revenue for the hotel owners. The company can also offer advice and guidance to franchisees on how to run a successful business.
The really good news for shareholders is that the focus on franchising and management is now boosting profits. In this morning's first-half results, InterContinental announced that adjusted earnings per share from the continuing business had soared 132% to 19p. Continuing revenue jumped 16% to £94m.
A fair whack of that growth came from increasing revenue from existing rooms -- Revpar (revenue per available room) rose 11.2% -- but income was also boosted by 3,500 extra rooms taking the total to 541,000. InterContinental plans to step up the pace here, and open more than 100,000 extra rooms by the end of 2008.
Are the shares worth buying?
The share price has slipped 8p this morning to 896p, perhaps on disappointment that InterContinental hasn't given firmer guidance on further returns of cash to shareholders. But even after the fall, InterContinental doesn't look cheap to me, more like fairly valued.
Bulls cite the earnings predictability outlined above and also argue that demand for hotel space will continue to rise. Indeed, InterContinental claims that China will become the world's largest inbound travel market within the next ten years, and will become the world's second largest outbound market over the same period. So newly-rich Chinese could push up the demand for hotel rooms across the world.
InterContinental is also generating healthy levels of cash -- first half operating cash flow came in at £128m.
Nevertheless, if you double up today's first-half earnings, you get earnings per share of 38p for this year, which puts the company on a current price/earnings ratio of 24. Sure, analysts are expecting earnings to grow around 30% over the next year, so the PEG ratio is less than one. But given short-term concerns about terrorism and geopolitical tension, I don't see a compelling buy case for this share right now.
Selling Property
But there's no doubt that InterContinental's asset sale has done wonders for the share price -- it's jumped 64% over the last two years.
I can't help wondering whether the likes of Marks & Spencer
(LSE: MKS)
and Sainsbury
(LSE: SBRY)
should follow InterContinental's lead and sell the freeholds to some of their stores, especially now that commercial property values look toppy.
