Credit Suisse cuts InterContinental price target but says price drop is an opportunity

It said the target price reduction is two thirds down to fx, with the balance due to higher cash outflows.

InterContinental Hotels reported a jump in full-year profit on Tuesday but said it would not be paying out any additional capital this year as it looks to reinvest savings in growth.

In the year to the end of December 2017, operating profit rose 7% to $759m versus consensus of $754m, while pre-tax profit was up 14.7% to $678m. Revenue edged up 4% to $1.8bn and group revenue per available room increased 2.7%. For the fourth quarter, RevPAR was up 4%.

The company lifted its dividend by 11% for the year to 104 cents and announced a series of new initiatives to build on its strategy and drive an acceleration in its growth rate.

Credit Suisse had been expecting a $500m special dividend with the results, but said that it would far rather see the company invest in enhancing its long-term growth credentials with a restructuring plan to drive better allocation of the same resources. It argued that the 2.7% drop in the shares following the results was a buying opportunity, with the new target price implying 20% potential upside.

"We estimate a one-off $200m cash return (the cost of the restructuring) would be circa 1.5% earnings per share enhancing whereas the aim to match industry-leading net room growth of circa 6% should have a material compounding effect and thus create more value for shareholders."

The bank removed a $500m special dividend from its 2018 estimates but said net debt improves only around $200m due to the restructuring charges and the reversal of a system fund surplus. However, it still models $2.6bn of special dividends from 2019 to 2022, with the company commitment to returning excess capital intact.

At 1240 GMT, the shares were up 1.4% to 4,631p.