InterContinental Hotels drops on Morgan Stanley downgrade

InterContinental Hotels Group was under pressure after Morgan Stanley downgraded its rating on the stock to ‘equalweight’ from ‘overweight’ as the shares approach its 3,050p price target with a more balanced risk-reward.

MS noted the stock has enjoyed a fairly strong performance this year and its 2017 price-to-earnings ratio is now close to its US-listed peer multiples.

Still, it continues to believe the business is attractive.

“We have been long-term supporters of IHG. It has an attractive fee-based asset-light model, a large pipeline, strong free cash flow, and scope to continue to generate double-digit EPS growth,” the bank said.

It pointed out that IHG will pay a $1.5bn special dividend in May – with a share consolidation, so structured as a 16% share buyback – and with continuing strong free cash flow MS estimates that it could retire an additional 40% of its market capitalisation by 2020.

Morgan Stanley said revenue per available room trends were mixed. US RevPAR is up 2.2% year-todate versus 2016 guidance of 2-5% for the listed US hoteliers, and the bank forecasts US RevPAR +4% in 2016.

“However, while we expect an acceleration from here, RevPAR trends disappointed in 2H15, Morgan Stanley economists have been becoming more cautious, and IHG's RevPAR has been underperforming peers.”

At 0926 GMT, IHG shares were down 2.5% to 2,737p.