Overall, investment banking analysts like what they’re hearing from public hotel companies about their near-term financial performance. However, some are revising down their growth forecasts in 2024 given concerns about the impact of economic storms.
Last week I offered my own earnings season topics. This week, here’s what the pros are saying, in a survey of recent reports issued by investment bank analysts for large public hotel companies.
- IHG: “The system’s net growth remains behind initial expectations [2.6 percent, year-over-year], which is not surprising, but raises further concerns for fiscal 2023, where expectations for IHG are expected to grow by about 5 percent according to industry leaders,” wrote Estelle Weingrod for JPMorgan Cazenove. The analyst believes IHG can still hit its target next year, thanks in part to lagging openings in China that are expected to continue over time, and given that overall its converting brands are performing well.
- Wyndham: Before earnings started, Truist’s Patrick Scholes met with Wyndham management. Scholes called in a report that the company has “additional opportunities for acquisitions” such as the recent acquisition of Vienna House and that the company “intends to double the size of the brand portfolio in five years”. Scholes noted that Wyndham’s pace of signings is now faster than initial expectations for its new extended-stay brand Echo – which could lead to 300 properties in the US over the next decade.
- Positive growth cycle: “Less funding means less signing in the industry,” Weingrod noted. “But then demand outstrips supply and prices and occupancy go up, which again makes the industry attractive and so both debt and supply come back.” At the budget and extended stay end of the market, Wyndham sees continued strength. “Funding is very much available for franchisees at similar long-term valuations, 75-80 percent, as last year,” Scholes noted.
- IHG: “Only a few weeks of visibility (limited visibility in Nov/Dec) but demand and prices still strong – no sign of weakening trends.— Weingrod of JP Morgan.
- Accor: “About 50 percent exposure to Europe,” noted Vicki Stern at Barclays. “Our economists are already predicting a European recession in ’23. Hotels are very circular.” That backdrop gave Stern “substantial uncertainty” about the company’s performance next year. At its worst, the recession has a similar impact to the great financial crisis of 2008/2009, when the decline in revenue per available room bottomed out at around 20 percent in the US.”
- Whitbread/Premier Inn: “We believe in the development trend [in the company’s profit and revenue] should remain positive in the short term as the lower pound makes the UK attractive for inbound [visitors], and makes travel abroad expensive for outbound countries,” wrote Andre Juillard of Deutsche Bank. Premier Inn is heavily exposed to the UK market and increasingly to the German market. “If Brits and Germans have to cut back on overseas travel, Whitbread could also benefit from slightly higher domestic leisure demand as people continue to holiday locally,” Juillard wrote.
Travel to the asset
- Accor: A headwind for the Paris-based giant relative to its peers is that it has higher operating leverage (essentially, debt) than Marriott, Hilton and IHG, Stern noted. Accor is exposed to a higher percentage of long-term leases and has a greater reliance on incentive fees from hotel partners, while its competitors derive more from franchising and the core management model. “Further crystallization of value in the form of asset sales may be a source of positive valuation surprise,” Stern wrote at Barclays.
- IHG: “About 70 percent of IHG’s cost structure is people costs,” JP Morgan’s Weingrod noted, “So wage inflation will have an impact. “Management can’t be precise yet, but a 4 to 5 percent wage inflation sounds reasonable.”
- Wyndham: Franchisees credit the company’s revenue management system with helping them “be more disciplined in maintaining room rates than in previous cycles,” Scholes wrote. Franchisees follow the system’s recommended rate about 95 percent of the time and have accepted that selling a property is not the best strategy for profitability or operational efficiency.
- Wyndham: “Alltra is the all-inclusive upper-midscale resort brand created through a strategic alliance with Playa,” Scholes wrote. “The official opening of the Cancun location took place last month. We view the long-term opportunities from Alltra, given the global franchisor and Playa’s strength in the all-inclusive space as a powerful combination.”
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