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

• Recent reports of InterContinental Hotels Group PLC (ADR) (NYSE: IHG)'s 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 is 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 laid out the firm’s bullish case for InterContinental Hotels Group. 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 explained.

Related Link: Top 4 NYSE Stocks In The Lodging Industry

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 noted that InterContinental’s return on investment capital (ROIC) has greatly improved in recent years.

Furthermore, 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; he pointed out that Choice Hotels International Inc (NYSE: CHH) currently trades at around 16.5x forward EV/EBITDA. In addition, he noted that restaurant franchises trade at 18x-20x forward EBITDA.

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

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