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Morningstar | InterContinental Brand Advantage Aided by Its New Avid Brand and International Traction

InterContinental posted solid first-half 2018 results with in-line results in its Americas region (72% of operating profit) and slightly stronger figures in its international segments (28%). Accordingly, we plan to lift our $57 fair value estimate by $1-$2, leaving shares slightly overvalued.

The Americas region reported first-half revenue per available room, or revPAR, and unit growth of 3.2% and 2.3%, respectively, generally in line with our 3% and 2.1% estimates for 2018. Within the region, U.S. demand was aided by strong corporate and group bookings, leading to revPAR growth of 2.9% during the second quarter, slightly below the 3.4%-3.5% lift posted by narrow-moat peers Hyatt and Hilton.

Meanwhile, InterContinental is seeing momentum in its greater China segment (7% of operating profit), where revPAR and unit growth increased 10.1% and 11.9%, respectively, tracking ahead of our 7% and 11% forecast for 2018. Strength is being driven by new room designs at its Holiday Inn Express brand (24% of greater China existing units but 37% of the region's pipeline), as the concept has represented over half of all pipeline rooms added in the region since the start of the year. This shows that third parties remain interested in joining the hotelier's brand, which offers an industry-leading 100 million-plus loyalty member presence.

InterContinental's brand advantage (source of its narrow moat) is also supported by success of its new midscale brand, Avid (launched September 2017), which already represents 7% of all hotels in the pipeline and 68% of all hotels added since the start of the year. As a result, the company saw 4.1% total room growth in the first half, slightly above our 2018 estimate of 3.6%. Also, its total room pipeline has grown 7% since the start of the year to 262,000, representing 32% of its existing base (below Hilton's 41%, Marriott's 36%, and Hyatt's 38%), supporting our 3.6% average annual unit growth estimate over the next 10 years.

InterContinental's brand advantage should also be supported once it completes the rollout of its new cloud-based reservation management system around the start of next year, as that will allow the company to roll out sales-enhancing software across its platform in real time. We see the announced 10% increase in dividend as a signal that management has confidence in the path its brand is on. We see InterContinental's free cash flow as a percentage of total sales averaging in the high 20s over the next five years, up from the mid-20s averaged over the past three years.