HSBC upgrades Intercontinental Hotels to 'hold'

HSBC on Wednesday upgraded InterContinental Hotels to ‘hold’ from ‘sell’ and lifted the target price to 3,700p from 2,900p.

With macro-economic indicators improving, HSBC said it is “more optimistic” about global revenue per available room (RevPAR) trends in key markets such as the US, France, and the UK.

Purchasing mangers’ index data across the globe is stronger, US economic growth has picked up and HSBC economists have raised developed market forecasts, the bank noted.

“With this improving backdrop and easier comparatives in 2017, we see upside versus expectations for all hotels in our coverage,” HSBC said.

HSBC expects IHG’s US business, which has been slowing for a number of quarters, to see RevPAR growth improve to over 2% in the fourth quarter from 1.4% in the third quarter. Fiscal year 2017 will benefit from the strengthening macro-economic conditions, improving oil markets, and easy comparatives.

The US hotel business may also benefit from US President-elect Donald Trump’s infrastructure plans. IHG has a “buoyant” construction pipeline for the expansion of hotel rooms, HSBC said.

“For IHG, we think the market expectation of around 2.4% group RevPAR growth in 2017 is well underpinned,” the bank added.

The strong US dollar against the pound also provides a tailwind. IHG’s headquarters are based in the UK, which HSBC said means 50% of gross central overhead and 40% of European regional overheads are incurred in sterling, providing a boost to numbers.

“Furthermore, 70% of IHG’s debt is sterling-denominated, meaning the target net debt/EBITDA of 2.5x leaves scope for around $300m of cash return.”

Shares rose 1.0% to 3,723p at 0942 GMT.