High spending business clients have yet to return to InterContinental Hotels in any great numbers, and the shortfall is not being made up by leisure customers, judging by its latest update.
The group, the world's biggest hotelier whose brands include Crowne Plaza and Holiday Inn, said third quarter revenues and operating profits had both fallen by 19%. Revenues per available room (RevPar) - a key industry measure - dropped by 15.2% in the third quarter although the decline narrowed to 13.5% in October. Chief executive Andrew Cosslett said:
The trading environment remains challenging. We see signs of occupancy stabilising but rate is still under considerable pressure across the board. The relaunch of Holiday Inn is gaining pace and continues to make a significant difference to the prospect of our biggest brand.
He maintained the company - which manages or franchises hotels rather than owning them - was well positioned "to lead the industry when the upturn comes" because of the "unique relationship" with its hotel owners along with its global scale and diverse brand portfolio.
But the market has taken note of the caution, and the company's shares have slipped 6.5p to 836p. Mark Brumby at Astaire Securities has a sell rating on the company, and he commented
InterContinental's franchised business model means that it is less sensitive to RevPar shrinkage than fully owned and managed groups. However, this is essentially a timing issue and we remain cautious on the outlook for the group.
Occupancy levels may be stabilizing but the switch from business to leisure customers has depressed rates.
Nigel Parson at Evolution Securities also has a sell rating on the business, although he did raise his target price from 485p to 630p "to reflect higher stock markets." He commented:
InterContinental's results were in line, trading is starting to be more predictable but the outlook is still negative and we do not anticipate any recovery until the second half o 2010. The stock price has been treading water relative to the market since April and we recommend taking profits.
InterContinental is outperforming its peers but it cannot escape the industry. In spite of selling many assets, the company remains highly operationally geared through management contracts. Hotels are a late-cycle play and next year will be muted with the supply of new rooms still coming through contributing to the anaemic recovery.
To provide a bit of balance, repeated its buy recommendation and 910p price target.
