Lodging M&A Isn't Over: How InterContinental Hotels Fits Into The Puzzle

• Recent reports of InterContinental Hotels’ potential buyout of Fairmont Hotels confirms MKM Partners belief that the hotel industry is positioned for further consolidation
• MKM believes that InterContinental’s fee business in underappreciated
• MKM is bullish on InterContinental’s stock and feels it should trade at a premium valuation

In a new report, MKM Partners analyst Christopher Agnew lays out firm’s bullish case for InterContinental Hotels Group PLC IHG. In addition to InterContinental’s underappreciated business, MKM believes that M&A will likely be a key driver for the company moving forward.

M&A news
A weekend report in London’s The Sunday Times indicated that InterContinental is nearing the closure of a $1.9 billion acquisition of Fairmont Hotels. MKM believes the industry is currently ripe for M&A.

“We believe industry consolidation will continue, including M&A, and we believe IHG is the more likely participant whether acquirer (Kimpton), target or merger,” Agnew explains.

Upside drivers
Agnew believes that InterContinental’s fee business, which is not very cyclical in nature, is also not fully valued by the market. In addition to strong fee income numbers, Agnew notes that InterContinental’s return on investment capital (ROIC) has greatly improved in recent years.

Futhermore, he sees a potential early-2016 catalyst for the stock, as shareholders could see a massive $1.3 billion special dividend capital return in the wake of two recent large asset sales by the company.

Outlook
MKM currently has a Buy rating on InterContinental and a $50 target for the stock. The $50 target represents 16x MKM’s 2016 EBITDA forecast for the company.

Agnew sees InterContinental’s “high-quality franchise” model deserving of a higher multiple than peers, and points out that Choice Hotels International Inc CHH currently trades at around 16.5x forward EV/EBITDA. In addition, he notes that restaurant franchises trade at 18x-20x forward EBITDA.

Disclosure: the author holds no position in the stocks mentioned.