InterContinental Hotels slides on Morgan Stanley downgrade

Morgan Stanley downgraded InterContinental Hotels Group (IHG) to 'underweight' on Monday after the shares' recent outperformance and on concerns that the US hotel cycle is peaking.

After rising 10% in the year to date, the price target was trimmed to 3,100p from 3,300p and saw a possible bear case of 2,000p as IHG was observed to now be trading at a 5% premium to its peers.

While the Holiday Inn and Crowne Plaza owner has attractive and resilient business model, Morgan Stanley has some concerns.

Growth in revenue per available room (revpar) in the USA has been slowing for some time, "and we think it will weaken further given declining occupancy, anaemic rate growth,
accelerating supply growth, one-fifth of submarkets in RevPAR decline", while its analysis of 'compression nights' - those high-demand nights where market-wide occupancy levels are 95% or more - has suggested Airbnb now having an impact as well as a trend for independent hotels to outperform branded chains.

"If we match these occupancy/RevPAR trends to the last two cycles, IHG shares are holding up much better," analysts wrote.

Forecasts for revpar have been reduced to 1.5% for 2017 and down to -1% in 2018 from earlier predictions of 2% growth, with the lower RevPAR offsetting another $500m stock buyback expected next year.

While IHG is still a quality operator, analysts highlighted that all hotel stocks de-rate sharply when revpar drops off.

In the last downturn, hotel stocks would on average move down to a price at 8-9 times EBITDA, whereas IHG is currently on 12 times 2017 expected EBITDA.

"M&A speculation may continue to provide support, but we think that IHG sees itself as more of a buyer than a seller, and it no longer owns 'trophy' assets.