Intercontinental Hotels Group: Checking in

We initiated a position in Intercontinental Hotels Group (IHG) in April after a substantial 34% decline in the share price, driven mainly by concerns about the global economic outlook. IHG is an old friend – the fund held a position in the 2010s and we have tracked it closely since including during the disruptive covid period and subsequent recovery. IHG is a leader in the global lodging industry, with a portfolio of 19 brands including iconic brands such as Holiday Inn, which has a leading position in the midscale segment, and Intercontinental Hotels in the luxury market. These brands are the bedrock of its asset-light franchise model which generates highly attractive economics.

For travellers, branded hotels offer consistent standards, peace of mind, and good value for money. For hotel owners, they typically generate higher revenue and profitability than comparable independent hotels, thanks to greater brand recognition, loyalty programmes, procurement scale, advanced revenue management systems, and global marketing efforts, which drive pricing power, repeat business and reduce costs. These advantages have driven steady market share gains for years and this looks set to continue - IHG’s share of the global pipeline of hotels in planning or under construction is more than twice its share of current room supply. There is also a significant growth opportunity in emerging markets, with IHG holding leading positions in China and India. For the group as a whole, management expect to deliver high-single-digit revenue growth and double-digit earnings growth over the medium-term.

The hospitality industry is cyclical, reflecting the discretionary nature of both business and leisure travel, which each account for roughly half of IHG’s revenue. However, the franchise model is more resilient than the ownership model. The majority of IHG’s revenue is generated from franchise fees which are assessed based on a fixed percentage of a hotel’s revenue rather than profit, shielding its fee revenue from hotel operating leverage. It is also asset light, with capital expenditure typically representing only 3-4% of revenue, and generates strong operating margins of nearly 50%. The Global Financial Crisis was particularly severe for the lodging industry with IHG’s revenue and profit falling 19% and 34%, respectively, in 2009, but the resilience of the franchise model was also evident - it still generated a very healthy profit margin and cash flow which allowed it to maintain its dividend and reduce debt, and it grew profits strongly in subsequent years.

IHG released an encouraging first quarter trading update on 8 May, with the shares reacting positively as it maintained guidance for double digit profit growth in 2025. RevPAR, which measures revenue generated from hotels in IHG’s franchise system, grew +3.3% and net system size, which measures the number of franchised or managed hotels, grew +4.3%. Encouragingly, while management noted some negative impact on US RevPAR following Trump’s “liberation day” tariff announcements in early April, global bookings for Q2 are higher than for the same period last year.

The recent decline in IHG’s share price left the valuation looking more compelling, with the P/E ratio falling from 28x to 19x following Trump’s tariff announcements. We view this as an attractive starting point given IHG’s strong market position, global scale and growth prospects. Given current political and economic uncertainty, we would not be surprised if there is more share price volatility in the coming months and have therefore built a small initial position of 0.8%, leaving room to add on weakness.