The following report provides a financial analysis of Intercontinental Hotels Group (IHG). Suitable ratios regarding profitability, liquidity, efficiency and gearing have been calculated and compared vis-à-vis one of its major rivals, Marriott International in order to provide an understandig of IHG’s relative financial position. Secondly, the report provides a discussion regarding some of the shortcomings of IHG’s financial statements from an investor’s point of view and highlights some of the non-tangible considerations that should be taken into account when investing in the hotel industry. Finally, the report puts forward conclusions stemming from the above mentioned sections.
This report was created by me and few my colleagues while we were studying at Koźminski University. Even If we used quite many assumptions and shortcuts, I still believe that it presents quite good framework and initial point of evaluation of publicly traded company. It was made about Spring 2013, therefore We didn’t have 2012 full year figures and therefore time evaluation ends at 2011. I also have quite much sentiment to this project as in that point of time, I decided that I would like to work for hotels in future. Doing University project that were later checked and evaluated by my professors enabled to gain some experience that were closer to practice than theory.
Intercontinental Hotels Group is a British multinational, with its headquarters in Denham, UK. It is the world’s largest hotel chain. When it comes to rooms, IHG has more than 670 000 in over 4500 hotels in nearly 100 countries and territories around the world, which means that annually, over 153 million guests chose to be hosted in its facilities (IHG, 2011).
Founded in 2003, through the separation of Six Continents PLC, IHG is one of the biggest companies in the world. The firm is involved in ownership, management, leasing and franchising hotels and resorts. The group operates a total of nine different hotel brands. InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites, EVEN™ Hotels and HUALUXE™ Hotels and Resorts (IHG, 2011).
The following figure shows a short SWOT analysis of IHG with relevant information retrieved from IHG’s official reports and statements.
II. Section A: Financial Ratio Analysis
II.I Profitability Ratios
When analysing the performance of IHG, first to explain is the large drop in its profits in 2009. This decrease is only partly caused by the financial crisis but also by vaguely explained allocation of significant resources. Due to the economic turmoil the sales decreased by roughly 23%, however, the costs of sales remained on the same level as 2008. Moreover, a considerable increase of the company’s impairments (e.g. Goodwill, assets held for sale, intangible assets) decreased the operating profit to $-10 million, whereas in 2008 the operating profits amounted to $417 million
II.I.I Marginal Analysis
IHG’s GPM has been volatile over the last years, however, overall it increases from 28.9% in 2006 to 33.6% in 2011. That means that the company improved its performance when it comes to controlling costs. Effective cost controls requires a high level of transparency at all levels of the hotel operations. From energy and utility costs to revenue per room analysis and food/beverage margin improvement programs.
The operating profit margins increased from 27.5% in 2006 to 30.1% in 2011, meaning that the company uses its fixed costs (such as salaries or rents) more efficiently. The higher the OPM, the higher is the liquidity and the sales growth relative the costs, which means expansion and development and therefore a positive feedback for investors.
After the economic turmoil, the net profit margin has not yet recovered to the level of 2006. That means that the company, after the financial downturn, did not use resources, materials and labour as efficiently as it used to. This leads to a threat that a potential decline in sales could result in a net loss or a negative margin.
Comparing the performance of InterContinental and Marriott International, it is observable that the latter mentioned is constantly underperforming. Although both multinationals had experienced setbacks in 2008 and even more in 2009 due to the financial crisis that occurred globally, IHG overall operates more efficiently when it comes to cost management and profitability margins.
II.I.II ROA / ROCE / ROE
The ROCE of IHG grows from 17.28% in 2006 to 25.24% in 2011. Ignoring the significant drop to -3.48% in 2009 due to the above mentioned circumstances, it can be concluded that the company increased its efficiency and profitability of capital investments. It shows that the company is earning more every year from the financial resources capitalized from investors. Looking at Marriott’s changes in ROCE, the conclusion is that InterContinental employs its capital more profitably than Marriott. Thus, the British multinational performs considerably better than its American competitor in terms of efficiency and profitability.
InterContinental’s ROA increases slightly during the past six years. That means that the company generates high returns through employing its assets and its translating the invested money into the net profits. Marriott’s results in this case are much lower, which means that it does not use its assets in such an efficient manner as the competitor.
ROE results are not that unambiguous. From 2006 to 2008, Marriott is doing as good or even better than IHG. Then, in 2009, when the crisis hit the companies, there was a decrease of both companies’ ROEs, nevertheless, Marriott had to experience a significantly stronger drop to -10.4%. Generally, the ROE of InterContinental’s results increased, which means that it makes profits from shareholder’s equity. Looking at the development from today’s perspective, IHG seems to have implemented the right strategic changes during the crisis to overcome the struggles and come out of the distressed time strengthened.
II.II Liquidity Ratios
II.II.I Current Ratio / Quick Ratio
IHG’s CR and QR numbers are significantly lower than 100%. This means that the company cannot fully rely on its current assets in order to paying off current liabilities. The sufficiently large gap between the ratios signifies that IHG depends much on inventories, making it an important part in covering current liabilities. However it doesn’t mean that the company has troubles with liquidity. Having a long history of managing its resources, the hotel giant is able to control its liabilities and get the best use of potential funding resources.
Comparing the two multinationals, it clearly emerges that Marriott has always been outperforming IHG in terms of the CR, which signifies better ability of Marriott to pay back short term liabilities with current assets. Nevertheless in the year of 2011 a downturn is seen for Marriott, which is mainly caused by a dramatic change in its inventory. Although growing, the QR for both companies are still rather low. This puts Marriott’s and IHG’s ability to settle all the liabilities in the nearest future under the question.
II.III Solvency Ratios
The Debt/Equity Ratio table indicates higher numbers in the case of IHG (except year 2006). InterContinental relies heavily on debt, it has more liabilities and less equity. A lower ratio is better for the company, as it means it is less risky for the investors, because in case of bankruptcy, debtors are paid first and shareholders last. In this case, Marriott is performing better, because it has less debt relative to equity of the stockholders – it is less risky.*
* The DER is not displayed in a graph due to the high number in 2008, when IHG’s equity equaled $1m compared to $ 311 m debt. The equity of $1m was caused, besides the economic downturn, by a large share repurchase ($137m) in order to preserve cash and maintain the strength of IHG’s balance sheet.
InterContinental’s gearing is very high, growing from 45.0% in 2006 to 70.8% in 2011, with the peak of 99.7% in 2008. Therefore, the rather venturesome IHG, a company with high gearing, is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A ratio between 25% and 50% means that business is operating well and a company is content to pay its financing through debt. In the case when the GR equals 50% or more, the company is considered highly geared. InterContinental’s leverage has been much higher within the shown period of time compared to its competitor Marriott. This means that the latter company has a higher risk aversion than IHG.
The ICR reveals how much financial threat a company experiences from its debt obligations. In general, InterContinental’s ICR is higher, except in years 2007 and 2008. The higher the ratio, the less the company is burdened with debt expenditures. A high interest coverage ratio indicates that a company can pay for its interest expense several times over, while a low ratio is a strong indicator that a company may default on its loan payments (Accounting Tools). This means that Marriott is more troubled with debt expenditures.
II.IV Efficiency Ratios
Receivables turnover has slightly increased from the year 2010 to 2011, showing an improvement in IHG’s ability to faster collect payments from clients. Now on average it takes the company 76 days to get the cash for services provided. Compared to the year of 2006the average collection period has improved by 30%.
Although Marriot’s receivable turnover is almost three times faster, IHG sees extended the average collection period as a promotional way of attracting more clients by offering more flexible payment terms.
As all the transactions in the company are interconnected, the APP is usually highly influenced by the ACP. IHG has still a gap between providing service and getting payments on hand. Thus the company has to postpone payments of its credit purchases. On the one hand, this certainly disappoints the company’s business partners, as they become more doubtful about IHG’s creditworthiness. Yet, on the other hand, it allows the company to have cash available for a longer time and possibly get better use of potential credit facilities.
Marriott certainly pursues a different policy of keeping business partners satisfied and paying off credit purchases as soon as possible.
III. Section B: Cash Flow Statement Analysis
III.I Net Cash Flow from operating activities
Evaluating IHG’s Cash Flow Statement, the following conclusion should be made: the main source for the company’s cash inflow is the Operating Cash Flow. For the past six years, activities directly connected to the core of the business grow and decline annually without a specific trend.
Analyzing the cash flow from activities that are directly attributed to company’s core business, clear is the fact that Marriott is more than two times more profitable than IHG when it comes to providing hotel services to clients. Having the same level of cash flow from Operating Activities in the year of 2008, Marriott was able to enlarge its market share in the following several years, while IHG experienced significant slowdown.
III.II Net Cash Flow from investing activities
Net cash flow from Investing Activities varies a lot year to year. If five years ago Investing activities brought a lot of cash inflow to the company, in the year of 2011 negative cash flow is captured. Nevertheless it is seen as a positive trend, and shows that IHG understands the importance of continuous growth. Thus, in the pursuit of expansion in the past year the company undertook the purchase of plant and equipment. As well as that IHG invested large portion in associates and joint ventures, which influenced negatively the overall cash flow in the short run, promising higher returns in the future.
Both IHG’s and Marriott’s Cash Flow Statements show that hotel giants have significant spending when it comes to Investing activities. It is possible due to the fact that both companies get enough cash inflow from operating activities to cover investment projects.
III.III Net Cash Flow from financing activities
IHG is engaged in public trading activities. The company issues and buy back shares and pay out dividends, which influences the cash flow and overall financial position of the company. Losses in section of financing Activities for the past year is due to the purchase of own shares by employee share trusts and dividends paid to shareholders.
On the other hand Marriott experienced even greater losses by spending on purchase of treasury stock, repayment of long-term debt and dividend payments.
IV. Section C: Valuation Ratio Analysis
IHG annually declares an amount of income that is to be distributed to the shareholders. The EPS indicator points out that IHG has larger profit earned per ordinary share, compared to Marriott. Share earnings in IHG show a rather stable history. Growing at a faster rate, IHG definitely established itself as being a lucrative and promising investment opportunity.
IHG have been paying out dividends over the whole period of the past six years. Unfortunately the declining DPS trend is seen over the analysed period, which is due to the fact that the company decides to retain more money in the business to help it growing. Marriott prefers a different policy: continuous sharp growth of dividends year by year to keep investors satisfied.
VI.I Limitations of the source data (balance sheet)
Financial ratios are only as reliable as the financial statements from which they are based; therefore any shortcomings of financial statements will be inherited by financial ratios (Atrill and McLaney, 2008). To that note, the calculated financial ratios are calculated based on balance sheet figures. Balance sheets, by definition present a snapshot of the company at a specific moment in time and therefore may not be an accurate portrayal of the financial position of IHG for all of 2011 (Atrill and McLaney, 2008).
VI.II Sudden drops in figures left unanswered
Another important shortcoming is that not all sudden drops in figures are sufficiently explained in the financial statements. Specifically, the DER ratio of IHG was extremely high since the equity was equal to $1 million in 2009 (IHG, 2009). The reason appears to be that the shares needed to be repurchased at the cost of $137 million but no further reason was given in terms of why this decision was made. This unusually low figure in terms of equity in 2009 had serious consequences such as lowered figures of DER and ROE ratio. One of the main reasons for operating losses in 2009 was the high cost of one of the Exceptional Operating Items, notably the Onerous Management Contract cost which amounted to $91 million. The stated reason was “(…) a performance guarantee due to certain management contracts with one US hotel owner” (IHG, 2009). The vagueness of the statement leaves many questions unanswered and may lead to a serious lack of confidence in terms of investing in IHG.
VI.III Risks and uncertainties in investing in hotel industry
When looking at the financial statements it is important to consider factors that might not be accurately accounted for. The extent of the accuracy of the measurement of intangible asset worth may be questionable. In December 2009, there was a lot of volatility recorded in terms of IHG’s “intangible assets” however no precise explanation was given as to why this happend and the extent of what “intangible assets” precisely covers is unclear (IHG, 2009). A number of important intangible assets such as intellectual capital including the knowhow and experience of the top management teams can have a significant impact on the organization of the business and the way it is perceived not only by investors but by the general public (Jerman et al, 2009). Such elements are however hard to fully account for and record in terms of figures and are likely to be left out of the financial statements.
A correct valuation of the company’s intangible assets therefore is likely to carry significant weight in terms of the level of confidence of potential investors but is likely to remain hard to fully accurately record and account for.
Secondly, factors such as future trends in the economy and travel industry as well as general law and taxation will have a profound effect upon the confidence of investors yet are not visible on financial statements. Recent years have been a time of general economic uncertainty and therefore weaker demand in terms of leisure industries such as hotels (Marriott International, 2011). The US which is the major place of IHG’s hotels has experienced a lull in economic activity and thus lower demand for lodging (IHG, 2011). Besides economic conditions there is always the issue of more unpredictable events such as natural disasters or national security threats in the form of terrorist attacks that may significantly decrease people’s desire to travel and use IHG services (IHG, 2011). Profits and overhead costs are dependent on any potential changes in taxes or other regulations and laws in the countries where IHG is located around the globe. IHG is a U.S. company and may suffer higher tax rates compared to local competitors, putting IHG at
a disadvantage. Tax revisions may occur in light of the economic crisis and recession, which could result in a higher effective tax rate and therefore a significant reduction in profits (IHG, 2011).
The following SWOT analysis takes under consideration the financial ratios which have been calculated and explored in comparison with a leading competitor, Marriott.
After closely evaluating the strengths, weaknesses, opportunities and threats, a founded conclusion can be made in terms of the finances of IHG. Firstly, the financial ratios reveal that the British multinational shows a relatively high profitability. Costs are generally controlled efficiently so that the profitability ratios outperform Marriott’s. IHG’s cash flow from operating activities shows a consistent level over the years with a tendency towards some growth, which is a very positive signal for the future. However, in terms of liquidity, IHG marginally underperforms. The time taken to pay back liabilities exceeds the benchmark set by its American competitor. Moreover, in regards to solvency, IHG shows a rather high leverage and thus finances its operations with a large amount of debt compared to equity. This increases the company’s vulnerability to economic downturns and removes much needed stability. Moreover the annually decreasing DPS is a negative signal to possible investors. The financial analysis suggests that currently investing in IHG is generally ill advised. Profits often go hand in hand with the DER therefore a highly leveraged company often shows higher profits since debt is less expensive than equity, however, as seen in the case of IHG, higher earnings per share actually mean higher risks. An evaluation of next year’s financial statements may show a more positive outlook in which case investment can be reconsidered.
- Atrill, P. and McLaney, E. (2008). Accounting and Finance for Non-Specialists. Harlow, England: Prentice Hall, 6th edition.
- InterContinental Hotels Group (2007-2011) IHG Annual Reports and Financial Statements. [report] URL: http://www.ihgplc.com/index.asp?pageid=56 [last accessed: 12.12.2012]
- Jerman, M. et al. (2009) Intangibles as future value creators; the case of the hotel industry. Tourism and Hospitality Management, 15 (2), p.153-162.
- Marriott International (2007-2011). Marriott International, inc. annual report. [report] URL: http://investor.shareholder.com/mar/default.cfm [last accessed: 25.12.2012]
- PWC (2005). Similarities and Differences – A comparison of IFRS, US GAAP and UK GAAP . [report] Price Waterhouse Coopers.
Authors: Tessa Tymowski, Mateusz Konopelski, Emanuel Wolff