Holiday Inn owner InterContinental Hotels Group (LSE: IHG) reported its Q1 earnings today (3 May) and I liked what I saw. Granted, IHG shares are down 3.7% to 7,594p as I write, but I’m not fussed about that.
In fact, this mini-dip could be the chance I’ve been looking for to become a shareholder. Let’s check in and see how the company got in during the first quarter.
Mixed results
InterContinental Hotels Group’s first-quarter revenue per available room (RevPAR) rose 2.6%, boosted by strong growth in Japan (16.9%) and Australia (10.2%) that offset weakness in the US (-1.9%).
While that was a big slowdown from the 33% room revenue growth in Q1 2023, it should be remembered that quarter followed the pandemic. So it was facing tough comparisons here.
That said, it missed its own analyst-compiled estimates for 3% growth in room revenue. And there was a miss in both the EMEAA (Europe, Middle East, Africa and Asia) and Greater China markets.
This probably explains the stock’s weakness today.
During the quarter though, it still opened more than 6,200 rooms across 46 hotels, which increased its net system size by 3.4% to 946,000 rooms. That is significant scale. And global occupancy edged up to 62%.
Doubling down on Germany
On 15 April, the company announced a 30-year franchise deal with Germany’s Novum Hospitality under which 108 hotels (15,334 rooms) and 11 hotels under development (2,369 rooms) will join IHG’s system by 2028.
This will increase the firm’s global system size by up to 1.9%, while doubling its hotel presence in Germany. In 2022, there were over 450m overnight stays in Germany, the second highest in Europe.
Deals such as this make financial sense when interest rates and construction costs are high for new locations. Nevertheless, economic weakness in some parts of the world is presenting challenges.
A system fund change
Additionally, there was an adjustment in its system fund relating to loyalty programme fees. This will “improve economics for our owners“, the firm said.
The fund is a central pool of money filled with franchise and management fees. All of its hotels (both operated and franchised) contribute to the system fund.
In return, they benefit from the collective resources that are used to improve the overall InterContinental Hotels Group brand and guest experience.
Asset-light business model
Overall, I’d say it was a mixed quarter. Good progress here and a bit of weakness there, but the seeds for future growth continue to be sprinkled.
There are two things I like here from an investing standpoint. First, its large portfolio of brands, including InterContinental, Holiday Inn, and Crowne Plaza, span the whole market, from budget to luxury.
Second, it increasingly licences these brands to third-party operators that pay it fees and royalties. This means the company has lower operating costs and is more profitable than a standard hotel group.
The stock is trading on a price-to-earnings (P/E) multiple of 21.5, which I reckon is decent value for such a high-quality business.
Looking ahead, I see further demand for hotels as rising incomes, particularly in Asia, fuel a boom in global travel. I reckon the group is perfectly placed to benefit from this, so I’ll be snapping up some shares in May.
