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IHG shares may not be cheap. But they are worth every penny

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Some investors may struggle to square InterContinental Hotels’ [LON:IHG] market value with its near-term outlook. After all, the hotel company’s shares currently trade on a forward price-to-earnings ratio of around 21x while it faces a challenging short-term future due to a likely slowdown in global economic growth and the effects of China’s ongoing zero-Covid policy.

However, the firm’s solid financial position, sound business model and long-term growth strategy mean that it is set to ride out present economic woes to generate rising profits, and share price growth, over the coming years.

IHG showing solid performance

The company’s latest quarterly trading update showed that it continues to deliver sound results. Revenue per available room (RevPAR) rose by 28% versus the prior year as it benefitted from increased global travel, while it was 2.7% higher than pre-Covid levels recorded in 2019. It also reduced net debt by 30% in the first half of the year, which suggests it is in a better position to cope with the current period of monetary policy tightening.

Encouragingly in an era of high inflation, its average daily rate per occupied room increased by 13% in the most recent quarter. Rising prices provide evidence of the firm’s solid market position. Indeed, its focus on mid-market brands, which account for around two-thirds of its total estate, means that it is in a strong position to overcome short-term economic challenges. They have historically been relatively unaffected by economic downturns and have also been quicker to recover.


Growth potential

Its range of brands was further expanded last month via a strategic alliance with Iberostar, which becomes IHG’s 18th brand. The agreement boosts the company’s total number of rooms by around 3% following growth in room numbers of roughly 0.6% in its latest quarter. With a pipeline of 278,000 rooms, which equates to 31% of its current estate, the company has a clear path to growth over the long run.

IHG is also investing heavily in its loyalty programme to retain existing customers. Its 100 million loyalty members account for around half of all stays and spend 20% more than non-members, on average. When combined with continued investment in its digital offering, including the release of a new mobile app, this helps to further differentiate the company from rivals and improves its competitive position.

As mentioned, China’s zero-Covid stance has weighed on the firm’s performance of late. For example, RevPAR in the country was 20% down year-on-year in the latest quarter. However, as restrictions gradually ease, China provides a likely growth catalyst on the firm’s top and bottom lines over the coming months.

IHG shares offer investment appeal

While IHG shares trade on a rich valuation during an uncertain period for the world economy, the company’s improving financial position and sound business model mean it is well placed to emerge in a stronger position relative to peers. Furthermore, the investment it is making in new technology and in improving its loyalty programme, alongside its growing total room numbers, mean it has clear growth catalysts that justify its premium valuation.

IHG opened trading today (6th December) at 4,766.25p and was up to 4,793p by 10:00. The hotel group has offered a year-to-date return of 0.3% and a one-year return of 5.5%. The company has a market capitalisation of GBP8.4bn.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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