Morgan Stanley upgrades IHG to “equal-weight” on resilient profits, fair value

Investing.com -- Morgan Stanley has raised its rating on InterContinental Hotels Group (LON:IHG) to “equal-weight” from “underweight,” increasing the price target to 9,000p from 8,800p.

The upgrade comes as the brokerage highlighted the company’s resilient profitability, stronger ancillary income streams, and improved valuation levels. 

“Overall profits and margins have been highly resilient (more than Accor) thanks to ancillaries/efficiencies, and given the shares have lagged US peers, and are now trading close to our price target … we upgrade to Equal-weight,” Morgan Stanley analysts said.

The analysts pointed to IHG’s operating model as less cyclical compared with European peer Accor , with more reliance on franchising fees and lower exposure to management contracts. 

The brokerage noted that “IHG has a greater exposure to franchising fees … much faster growth in ancillary income (credit card fees and loyalty points), and stronger cost control and margin performance.” 

Ancillary income, including credit card and loyalty revenue, is expected to provide a 7% EBIT tailwind this year, while net unit growth is forecast to be stronger than Accor’s.

Despite this, IHG’s revenue per available room (RevPAR) remains weak. Morgan Stanley forecasts just +0.1% growth in the third quarter, weighed down by slower performance in the U.S. and China. 

The brokerage highlighted that “IHG’s geographic exposure (US/China) continues to create weaker RevPAR trends with Q3 forecast to be +0.1%,” though loyalty scheme performance and distribution metrics suggest a more robust underlying system.

Both IHG and Accor generate similar about 60% profit margins, which remain below U.S. peers such as Marriott and Hilton at around 90%. Free cash flow conversion is also comparable, at 55-60% on Accor’s definition and 95-110% on IHG’s definition of FCF-to-earnings. 

Both companies are expected to deliver mid-teens EPS growth between 2025 and 2028 and return 7-11% of market capitalization annually through a combination of dividends and buybacks.

On valuation, however, Accor remains cheaper. IHG trades at 22.5x FY26 earnings and 15.6x EV/EBITDA with a 4.1% free cash flow yield, while Accor trades at 16.9x earnings, 11.1x EV/EBITDA and a 7.3% FCF yield. 

Morgan Stanley analysts said, “We think Accor deserves a discount, but this looks too high,” but acknowledged that IHG’s shares “now fairly valued” after lagging U.S. hotel operators.

The brokerage said that while Accor has benefitted from stronger RevPAR growth due to its European exposure, IHG’s more resilient fee structure and efficiency gains give it stability. “IHG has a more resilient model with ancillaries/efficiencies offsetting weaker RevPAR,” the brokerage said.