The pandemic left a huge question mark over the hotels industry. Lockdowns weren’t exactly conducive to holidaying overseas and working from home meant business meetings were held remotely and on screens propped up on kitchen tables and the like. Yet the crisis passed, the urge to travel abroad in search of a sunbed has reasserted itself with remarkable speed and Zoom sessions are giving way to in-person, face-to-face meetings once again.
All that has been positive for InterContinental Hotels Group. IHG’s origins may lie in Bass Pale Ale, first brewed in Staffordshire in 1777, but a long string of corporate manoeuvres led to the company shedding beer in favour of what is now a global hotels network embracing Crowne Plaza, Holiday Inn and InterContinental itself. Mainly through franchises and management contracts, it boasts 888,000 rooms in more than 6,000 premises worldwide.
Third-quarter figures painted a buoyant picture of a gradual return to pre-2020 normality, with more to come. Leisure revenues were 12 per cent ahead of 2019 levels, although business and group bookings are not yet fully restored. The company does not release quarterly sales and profits figures, but it is building on half-year sales up 49 per cent at $840 million, which took operating profits from $188 million to $377 million. Half-year earnings per share tripled from 40.4 cents to 121.7 cents.
For the third quarter we have to rely on its key metric of revpar, or revenue per available room. This showed a jump of 27.8 per cent on a year earlier and 2.7 per cent up on the third quarter of 2019. But occupancy rates are still 5.8 per cent down on three years ago, suggesting there is more to go for, particularly as customers have stomached an 11 per cent price rise since 2019.
As with any well-diversified portfolio, IHG’s rarely fires on all cylinders at once. In the July-to-September period, trading was strong in the United States, flat in Europe and lagging in China, where building costs and Covid are choking hotel openings. However, the group has plenty of new properties to unwrap, especially in Europe, the Middle East, Africa and Asia.
Apart from the Covid dip in 2020, in the past five years the shares have oscillated largely between the £40 and £55 marks. In April last year this column said the shares were a hold at £50, and they rose to £52 six months later.
The company earns in dollars, which translate well at the present pound-dollar exchange rate, but it also calculates dividends in dollars, which does not favour UK shareholders.
Last year the second-half operating profit was nearly three times that of the first half. Progress this year is unlikely to be quite so dramatic, but 300 cents of annual earnings per share is a fair prospect. At $1.13 to the pound, that would put the shares on a reasonable 17.1 times earnings.
The dividend was suspended in respect of 2020, but was restored this year to 85.90 cents. The last pre-Covid payout was 125.80 cents, which must be an early target. In August an interim dividend reappeared at 43.9 cents, reflecting, the company aid, “the confidence we have in continued progress”. Nothing in the latest bulletin suggested anything other than a useful uplift in this year’s final payment to produce a likely 2.5 per cent yield.
The overall message is of recovery, with another 1,850 hotels and 278,000 rooms in the pipeline. While there are continuing cost pressures and uncertainty, Stuart Gordon at Berenberg thinks the shares should start to rise this year as stronger earnings come through.
ADVICE Buy
WHY Continued recovery from the pandemic suggests shares are poised to break out of their five-year trading range
Norcros
Investors are unsure which number is larger — the total of people improving their homes rather than moving, or those postponing such projects in favour of heating and eating as the rise in prices outruns wage increases. Hence a renewed focus on the property sector and, in particular, the world of DIY.
Norcros is best known for Triton and Merlyn showers, Croydex bathroom accessories, Abode taps and Johnson tiles. It estimates that sales for its half-year to October 2 were £220 million compared with £200.9 million in the same period last year and £181.2 million for the first half of 2019. The company cautiously predicts “no less than £21 million” in underlying operating profit, compared with £22 million a year ago.
Within the sales total, those in Britain slowed by 3 per cent while they grew by 10 per cent in South Africa, the company’s other main territory. The group used to be in several other countries, including Nigeria, India and Australia, but during an eight-year absence from the stock market most of the other overseas interests were sold. Last year South Africa accounted for a third of total turnover and a quarter of operating profit.
The UK has a far more fragmented home improvement market than South Africa and Norcros is constantly looking at taking advantage of this with takeovers. The group also wants to develop the international pipeline, which may add risk as well as reward, of course.
This column last examined Norcros four years ago, which seems a world away. The shares were 214p then and recovered strongly from the Covid outbreak to breach the 300p watershed at the start of this year. But the Ukraine war and the cost of living crisis have dragged them down with the rest of the stock market.
If there is only a modest increase in earnings per share to 40p for this year, the shares are trading on a 4.4 price-earnings ratio. An unchanged dividend would give a 5.6 per cent yield. We will know more when the company reports its full interim results on November 9.
ADVICE Buy
WHY Undervalued shares that more than take account of foreseeable downsides
