Goldman Sachs revised its ratings in the European hotel sector in a note on Wednesday, upgrading InterContinental Hotels Group from “neutral” to a “buy” and lowering its rating Wine bread (LON:) to ‘neutral’ from ‘buy’.
For IHG, Goldman Sachs has raised its price target to 9,350p, indicating a potential upside of around 20%.
“This creates an entry point into a high-quality asset-light hotel franchising platform, offering an EPS CAGR of 15.1% over the period 2023-28E, a shareholder return of 7% on dividends and buybacks, and one of the highest ROICs (approximately 46% 2025E) in our coverage,” analysts said.
This comes on the back of stronger-than-expected commission revenue growth and larger share repurchases, factors that Goldman expects to exceed consensus estimates.
The company’s improved earnings trajectory reflects IHG’s strengthened enterprise platform, which includes enhancements to its loyalty program and brand portfolio, as well as operational improvements such as the integration of Amadeus’ guest reservation system.
The valuation gap between IHG and its US peers is another factor influencing Goldman’s decision to upgrade.
Over the past six months, IHG shares have fallen against US hotel giants like Marriott and Hilton, widening the price-to-earnings discount to around 17-18%.
However, this valuation gap is seen as unwarranted given IHG’s improved EPS growth prospects and strong returns on invested capital.
“IHG’s improved long-term EPS growth algorithm, enhanced enterprise platform and optional additional revenue stream capabilities, in our view, merit a smaller valuation discount to key U.S. peers,” analysts said.
An additional opportunity lies in IHG’s additional revenue streams, particularly from co-branded credit cards. Goldman sees significant potential for IHG to negotiate better terms with its credit card partners, which could drive further profit improvements and support incremental share buybacks.
Currently, IHG’s revenue from co-branded credit cards is not fully reflected in its valuation, but improvements in this area could provide significant upside.
Additionally, IHG’s asset-light business model, with 72% of rooms franchised, supports high levels of cash generation and shareholder returns.
With a return on invested capital expected to reach approximately 46% by 2025, IHG is expected to maintain its position as one of the most profitable companies in the hotel industry.
The company’s ability to convert profits into free cash flow has also been a key factor in supporting the buyback program, which is expected to deliver an annual return of approximately 7% to shareholders.
Whitbread, on the other hand, has been downgraded to ‘neutral’ with a price target of 3,500 pence, reflecting a more modest upside of 14%.
While Whitbread remains a well-managed company with a clear strategy to capitalize on structural shifts in the UK hotel market, Goldman Sachs has become more cautious about its near-term growth prospects.
The company’s UK like-for-like sales growth is expected to remain subdued at 0.5% in FY25, reflecting soft RevPAR trends and relatively low room additions.
Whitbread’s UK operations are also expected to add only 1,000 new rooms in FY25, limiting growth in the near term.
While Whitbread continues to benefit from the long-term migration from independent to budget hotels, and its expansion strategy in Germany provides future opportunities, these factors are not expected to deliver significant performance in the short term.
“If RevPAR were to weaken, WTB’s higher downside operating leverage relative to peers would prompt us to see greater upside potential elsewhere in our trailing-12-month coverage,” analysts said.
Whitbread’s higher operating leverage means that any decline in sales would have a more pronounced impact on profitability compared to asset-light competitors such as IHG.
