Interactive Investor

Why shares in these hotel chains are still too cheap

19th January 2023 15:34

by Graeme Evans from interactive investor

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A recovery is under way, but there's much more to go for at these well-known businesses. Our City writer has the details.

A woman pulls a suitcase in a hotel lobby

A robust start to the year for leisure stocks Whitbread (LSE:WTB) and InterContinental Hotels (LSE:IHG) has been backed to continue after analysts this week forecast further big upside for shares.

Premier Inn chain Whitbread has jumped by 15% so far this year to just below 3,000p, but City firm Liberum urged investors not to check out after highlighting a new target of 3,740p.

Their upgrade from a previous estimate of 3,320p followed Whitbread’s encouraging third-quarter update, when it reported UK accommodation sales 24% ahead of the previous year.

The stronger performance came from hotels both in London and the regions, with the company reporting a well-balanced mix of business and leisure customers. The revenue trends have continued into the current quarter, with good occupancy and high average room rates set to sustain strong growth in revenues per available room (RevPAR).

Liberum adds that net cash of £284 million gives scope for bolt-on acquisitions to support Whitbread’s loss-making business in Germany and for future dividend payments.

The stock trades at an enterprise value to earnings multiple of 10.5 times, but Liberum notes that on a pre-IFRS 16 accounting basis the level of 8.8 times compares to 8.4-14.9 times in the five years before Covid.

Whitbread’s exposure to the UK and German economies and its asset-heavy model meant the stock underperformed significantly last year. However, growing optimism for a more resilient operating year means a recovery for shares has accelerated at the start of 2023.

Analysts at Deutsche Bank are also upbeat after this week raising their price target to 3,530p from 3,100p previously.

On top of stronger operating trends, they said Whitbread remained a "value" call based on a market capitalisation that still does not fully reflect the book value of the company.

It added: “The main risks come from a depressed situation in the UK and Germany, which could affect the recovery and RevPARs.

“Considering that operating costs remain under control and utilities are already hedged at 75% in FY2024, we see little risk on that side. Higher raw material costs or interest rates could reduce the development pipeline.”

The bank also has a positive stance on InterContinental Hotels (IHG), whose shares it now rates at 5,730p compared with 5,230p previously.

The FTSE 100-listed stock, whose asset-light and cash generative business model made it one of the sector’s more resilient performers during 2022, is up by around 17% to 5,562p so far this year.

IHG is the world’s third-largest hotel group with around 900,000 rooms under management or franchise, mostly in North America. However, it is also exposed to the reopening of the China economy as the country represents about 35% of its future pipeline.

Bank of America raised its price target to 6,300p this week and said a strong balance sheet and record of cash generation increased the potential for additional returns to shareholders.

On a price/earnings multiple, it notes IHG is trading at about 20 times forward earnings. This is the lower half of the historical range, whereas Bank of America’s new price target would leave it broadly in line with the average at 23 times.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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