UBS downgrades InterContinental Hotels, says recent rally was premature

UBS cut its stance on InterContinental Hotels on Wednesday to ‘sell’ from ‘neutral’, arguing that the recent rally was premature, new risks are underappreciated and the stock is "priced for perfection in an uncertain recovery".

The bank noted IHG has outperformed peers by 10% as high domestic exposure of 85% has underpinned recovery hopes.

"However, we believe the recent rally is premature and turn more cautious as: (1) IHG is highly exposed to new shifts in corporate travel that will likely dampen recovery hopes in FY21; and (2) data indicates already declining numbers of new hotel projects, which will reduce the pipeline and translate into slower unit growth ahead (UBS estimates 1% in FY22)."

UBS said that with the shares trading on 17x 2022E EV/EBITDA and a 2022E price-to-earnings multiple of 23x, the strength of the business model is captured but the risks of a slower-than-expected recovery in revenue per available room (RevPAR) are likely underappreciated.

The bank cut its FY21 earnings per share estimate by around 25% but lifted its price target to 4,300p from 3,820p.

UBS said it will likely take five years for the company’s RevPAR to recover to 2019 peak levels.

"IHG's recovery should be helped by its high domestic exposure, but we remain cautious on near- and long-term corporate travel trends," it said.

UBS said its new travel managers survey highlighted conservative attitudes in the US, with only 8% of managers expecting travel mostly to recover in FY21 versus 38% expecting full suspension, and a real risk of a step-change in corporate behaviour towards travel.

IHG has been among the travel and leisure stocks that rallied sharply this week on news that the Covid-19 vaccine being developed by Pfizer and BioNTech has shown 90% efficacy.