EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Accor's Investor Day Highlights Recent Transformations That Support Its Brand Advantage

Accor's investor day highlighted its ongoing transformation into a more asset-light business across high growth regions with an increasing mix of luxury accommodations that we believe will continue to support its brand advantage (source of its narrow moat) and our EUR 41 valuation, which estimates high-teens annual sales growth (aided by acquisition) and operating margin expansion to 23.5% in 2022 from 22.8% in 2018. We see shares fairly valued trading at 15.5 times 2019 EV/EBITDA.

We applauded Accor's decision to sell the majority of its owned hotel portfolio this year and focus on a higher ROIC asset-light structure, which has resulted in around 10% of company EBITDA coming from owned assets today versus over 50% in 2013. We also like Accor's just announced decision to acquire the 47% stake it currently doesn't own of the Orbis owned portfolio in early 2019 for a reasonable 8.5 times 2018 EBITDA multiple with plans to eventually sell these hotels, which would further support ROIC through a higher asset-light mix.

Accor's brand advantage has also been enhanced via acquisitions and partnerships that have diversified its portfolio into faster growing regions. Today, Europe is 49% of Accor's total rooms versus 74% in 2014, as the company focuses on developing regions like China (8% of total rooms), India (1%), and Middle East/Africa (9%) that are all set to grow around 10% annually the next few years. In particular, Accor's partnership with Huazhu in China has driven the region's room pipeline to 18,000 from 6,000 in 2015, while the recent Movenpick acquisition has given the company a leading 34% room share in Middle East/Africa (number two has a 31% share).

Accor has boosted its luxury mix to 41% of rooms in 2017 from 22% in 2014 via acquisitions (namely its FRHI deal that closed July 2016), which we believe lowers its risk to alternative accommodation competition that still largely plays in the lower priced urban portion of the marketplace.

As a result of these efforts, Accor reiterated its target to reach EUR 1.2 billion of EBITDA in 2022, driven by 5% annual room growth and margin expansion. While we expect operating margins to expand 70 basis points to 23.5% in 2022 versus 2018 estimated levels, we find the 5% unit growth forecast as aggressive, despite roughly 95% of its rooms coming from non-U.S. markets where brand hotel penetration is only around 30%-35% (versus 70% in the U.S.), allowing Accor the opportunity to convert boutique units into one of its 33 brands. Instead, we believe Accor will grow units around 4% annually the next few years as it faces competition from narrow-moat peers Wyndham, Marriott, Hilton, and InterContinental, which all offer larger loyalty member networks (Accor is the fifth largest at 50 million members, well below Marriott's 120 million base) and greater scale advantages (Accor has the fifth most rooms in the industry at 685,000 versus 1.3 million for Marriott). Therefore, we believe Accor's 2022 EBITDA will come in a bit above EUR 1.1 billion, barring any additional acquisition or investments, which remain a possibility.