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Why I’m confident in Intercontinental Hotels shares despite today’s dire results

Hospitality has been one of the hardest hit sectors as a result of covid-19. This is why Intercontinental Hotels Group (LSE: IHG) shares have slumped. The shares are down 20% so far this year.

Intercontinental Hotels shares already recovering

The group has today revealed results for the first half. In the six months, Intercontinental saw RevPAR slumping 52% to $488m. The UK was particularly hard hit as hotels were closed. The fact net debt fell 12% in these circumstances I think shows the quality of the group. 

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On the back of these results, at the time of writing, Intercontinental Hotels shares are up nearly 7%.

But it was expected

At the end of June the company had updated that most hotels were back open. Only 10% of hotels were still closed back then. The best result was in Greater China where only 1% were closed. The group has 5,900 hotels with 883,000 rooms globally.

The hotelier at the end of June was indicating it expected to announce a comparable RevPAR decline of 75% for Q2, resulting in a fall of 52% for H1. So the results today are in line with these forecasts. Investors may be happy there were no further downgrades or nasty surprises.

The group has been helping its franchisees get through the crisis. This has hit it financially in the short term but should help it recover once the worst of the crisis is over.

The group has been cutting costs and has around $2bn of liquidity. It has also been making use of government schemes to support its business. And it has cut the dividend to save money and keep its balance sheet strength.

What could the future hold?

A further fear investors may have post-crisis is whether more business will be done online rather than face to face at conferences for example. If so, this would have an impact on hotels. However, I expect a lot of business will continue to be done face to face once the immediate concerns fade away.

Already occupancy is picking up at InterContinental’s hotels. Occupancy has been rising in recent weeks back up to 45% which, while still low, is a dramatic improvement in a short period of time. If this trend can continue, Intercontinental could make a quicker recovery than many expect.

I think business and leisure travel will eventually pick up again and therefore Intercontinental doesn’t, in my opinion, face a structural challenge. As a group that’s primarily a franchisor, it’s an asset-light business model that should be able to produce profits and cash for investors in more normal conditions. It has been able to in the past and I’m not sure the long-term future looks any less bright.

This is why, despite today’s results, I may be tempted to buy Intercontinental Hotels shares ahead of a future recovery.

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Andy Ross owns no share mentioned. The Motley Fool UK has recommended InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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