Business Analysis and Valuation of InterContinental Hotels Group PLC

 

Empirical analysis

 

1.Discounted Cash flow (DCF valuation of the stock (common equity) in the company by identifying the key assumptions for the DCF analysis presenting relevant cash flows tables and applied valuation formulas estimating how sensitive the value estimates are to changes in the key assumptions.

DCF analysis is a valuation method that is used to determine the value of an investment on account of the future cash flows expected from the investment as seen from (White, 2020).DCF analysis uses a discount rate which is equal to the WACC of the company. In the case of Intercontinental hotels group, we shall assign a 7% WACC because the company is financially strong and can get equity and debt investments cheaply from the capital markets. We shall use the average of the average free cash flow for the past 5 years at Intercontinental hotel and multiply this by the expected rate of growth to arrive at free cash flows for the next five years.

 

Intercontinental Hotels Group in millions USD
Year 2020 2019 2018 2017 2016 2015 2014
Free cash flows 1516 -492 542 -59 -981 1043 7276
Average cashflows 105.2          
 Annual increament in cashflows in percentage 40.83 -104.77 -104.77 -87.14 -101.98   -132.97
Average increament in cashflows percentage -51.08 48.92      
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 8.94% 774.37 401.13 207.78 107.63 55.75
Discount factor 7% 774.37 374.88 181.49 87.86 42.53
Sum of all future cashflows 1461.135        
Outstanding shares 1.8E+08
Share price valuation(sum of future cashflows/outstanding shares) 7.974756
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% 774.37 401.13 207.78 107.63 55.75
Discount factor 2% 774.37 392.99 199.44 101.22 51.37
Sum of all future cashflows 1519.38        
2010 2011 2012 2013 2014 2015 2016
Revenue Growth 34204 48077 61093 74452 88988 90567 135987
Percentage Growth 71.14421 78.69478 82.0569 83.66521 65.43861 50.92 76.4547
Average Percentage Revenue Growth 67.31341
Revenue Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted revenue 652255.1 1101985 1.86E+08 3.15E+08 5.31E+08
Cogs 3224 3432 6453 5665 4655 45245 3454
profit margin 0.905742 0.928615 0.894374 0.923911 0.94769 0.5 0.9746
EBIT
Year 2020 2019 2018 2017 2016   2015
EBIT 3888 3000 5376 4554 4000   3800
Average cashflows 4163.6        
 Annual increament in cashflows in percentage 40.83 -70.92 -70.92 27.54 53.08   34.45
Average increament in cashflows percentage 111.82        
Average Percentage EBIT Growth 111.82
EBIT Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted EBIT 4360.98 7367.876 1244803 2103094 3553177
2010 2011 2012 2013 2014 2015 2016
Capex expenditure 34204 48077 61093 74452 88988 90567 135987
Percentage Growth 71.14421 78.69478 82.0569 83.66521 65.43861 50.92 76.4547
Average Percentage Capex Growth 67.31341
Capex Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted Capex 652255.1 1101985 1.86E+08 3.15E+08 5.31E+08

 

 

 

 

 

The share price of the intercontinental hotels group was  $66.69 as seen from (Yahoo Finance, 2021) which shows that the share price is overvalued if compared to the share price valuation.

 

  • estimating how sensitive the value estimates are to changes in the key assumptions

 

Supposing we use the risk free rate of the US treasury yield at 2.07% as seen from (US Department of Treasury, 2021), the cash flows will be as follows

Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% 774.37 401.13 207.78 107.63 55.75
Discount factor 2% 774.37 392.99 199.44 101.22 51.37
Sum of all future cashflows 1519.38        

The change in discount rate from 7% to 2.07% which is the risk free rate would improve the present value of future cash flows to $1519.38 million

 

2) a relative valuation of the stock (common equity) in the company by

  • preparing a list of comparable (peer) companies, using criteria that are justified to be appropriate
  • choosing multiples that will be used in comparing companies across the peer group
  • evaluating the company against its peers using the chosen multiples

The chosen set of competitors to the Intercontinental hotels group are the Marriott hotels and the Hyatt Hotels as seen from (Craft, 2021).

 

The following shows table shows relevant cash flows for Hyatt  as seen from macro trends (Macrotrends, 2020)

Hyatt
Year 2020 2019 2018 2017 2016   2015
Free cash flows 174 441 -130 179 6   2000
Average cashflows 134        
 Annual increament in cashflows in percentage   39.46 339.23 -232.70 10.74   -99.80
Average increament in cashflows percentage -20.74        
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% -36.09 7.49 -1.55 0.32 -0.07
Discount factor 7% -36.09 7.00 -1.36 0.26 -0.05
Sum of all future cashflows -30.238        
Shares outstanding 3E+08        
Share price valuation -0.09        
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% -36.09 7.49 -1.55 0.32 -0.07
Discount factor 7% -36.09 7.33 -1.49 0.30 -0.06
Sum of all future cashflows -30.00        
2010 2011 2012 2013 2014 2015 2016
Revenue Growth 5355 35345 13543 2964 4783 5675 4567
Percentage Growth 15.151 260.9835 456.91633 61.969475 104.7296 130.941 105.3761
Average Percentage Revenue Growth 135.22
Revenue Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted revenue 7E+07 97480602 131817467 178249254 2.41E+08
Cogs 2132 2423 4242 3133 2342 4313 121
profit margin 0.6019 0.931447 0.6867755 -0.057018 0.510349 0.24 0.973506
EBIT
Year 2020 2019 2018 2017 2016   2015
EBIT 3200 3000 2500 3000 3800   3800
Average cashflows 3100        
 Annual increament in EBIT in percentage 40.83 -70.92 -70.92 -40.69 0.84   27.73
Average increament in EBIT percentage 2.32        
Average Percentage EBIT Growth 102.32
EBIT Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted EBIT 90.382 92.47929 94.622491 96.815365 99.05906

 

 

Marriot hotels as seen from (Macrotrends, 2021).

Marriot hotels
Year 2020 2019 2018 2017 2016 2015 2014
Free cash flows 641 -107 -69 -458 770 25000 987
Average cashflows 155.4        
 Annual increament in cashflows in percentage   -599.07 155.07 15.07 -59.48 -74.12 740.34
Average increament in cashflows percentage -2.61        
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% -16.76 0.44 -0.01 0.00 0.00
Discount factor 7% -16.76       0.00
Sum of all future cashflows -16.761        
Shares outstanding 3.4E+08        
Share price valuation negative        
Future cashflows          
Year 2021 2022 2023 2024 2025
Future cashflows increased annually by 21.88% -16.76 0.44 -0.01 0.00 0.00
Discount factor 7% -16.76 0.43 -0.01 0.00 0.00
Sum of all future cashflows -16.34        
2010 2011 2012 2013 2014 2015 2016
Revenue Growth 3242 3432 3432 4454 4454 4522 5422
Percentage Growth 94.4639 100 77.0543 100 82.14681 99.56 119.375
Average Percentage Revenue Growth 90.1078
Revenue Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted revenue 4.1E+07 3.7E+07 3.3E+07 29666219 26731580
Cogs 2132 2423 4242 3133 2342 4313 121
profit margin 0.34238 0.294 -0.23601 0.296587 0.474181 0.0462 0.97768
EBIT
Year 2020 2019 2018 2017 2016   2015
EBIT 4300 3800 4000 4500 4200   3800
Average cashflows 4160        
 Annual increament in EBIT in percentage 40.83 -63.17 -63.17 -5.10 51.26   41.18
Average increament in EBIT percentage 15.62        
Average Percentage EBIT Growth 115.62
EBIT Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted EBIT 4624.74 4732.03 5471.1 6325.606 7313.569
2010 2011 2012 2013 2014 2015 2016
Capex expenditure 3434 3232 3443 3432 4323 4322 4323
Percentage Growth 106.25 93.8716 100.321 79.38931 100 100.02 100.046
Average Percentage Capex Growth 198.215
Capex Growth Rate Projection % 2021 2022 2023 2024 2025
Forecasted Capex 4580.76 9079.76 17997.5 35673.78 70710.92

 

 

 

 

 

Final estimate and recommendation

As seen from the above analysis, the intercontinental hotels group is the only one with has a positive share price valuation compared to its peers, the share price is overvalued and should be sold off given its share price at close of business in the end of June 2021 was $66.69 (Yahoo Finance, 2021).

 

 

 

Preliminary Literature Review

The literature review of this research will mainly focus on three articles that address different elements of the research topics. The articles have addressed the main issues in the research questions, but there are gaps that will be addressed in this research. The article by Krautheim and Schmidt-Elsenlohr (2011) explains the evolving tax competition between two countries with one being a small tax haven and the second country being a large tax haven therefore impacting cash flows of ,multinational hotels such as the intercontinental hotels group.

Standard theories of the capital structure emphasize that in making their capital structure choice corporations trade off the gains from an increase in 3 the leverage, obtained through a larger interest deduction from taxable profits, against the increase in the agency cost of debt, reflecting the inability to solve potential conflict between equity and debt claimants by means of contracts (Creswell & Plano Clark, 2018). Assuming that a corporation has more than one location, this approach could be extended also to a transnational or multinational company. However, in this case affiliates have improved access to credit as the company might use intercompany loans rather than only external credit in order to increase the leverage of affiliates in high-tax countries. The financing decision of the multinational corporation, thus, may be particularly sensitive to local tax rates with adverse consequences for the local tax revenue. Facing the increased ability of multinational corporations to make use of the tax shield by debt in high-tax countries, governments are tempted to restrict the use of debt by means of Thin-Capitalization or Earning-Stripping rules. Those rules typically limit interest deduction up to a fixed relation between equity and debt, usually qualified as the debt which is financed by a shareholder, or deny the deduction of interest expenses above certain thresholds. Then, the interest paid for an excess leverage cannot be deducted from the tax base.

Methodology

The primary research method for this thesis is literature review (Creswell & Plano Clark, 2018). The method will utilize existing secondary sources on the subject matter to address the research questions. The choice of the research method is influenced by the existence of adequate secondary research on the topic.

Research Design

Research design explains how the results of the research will be interpreted. There are two approaches in the research design including inductive and deductive reason. Through inductive reasoning, the researcher evaluates the general assumptions from statements or examples, while in deductive reasoning there will be specific examples that predicts or explains the findings from universal theories or assumptions. The section will consider whether the issues of research are ontological or epistemological. Epistemological is what is considered as acceptable knowledge and it focus on methods to study the social realities. Ontological approach respects the differences between objects I natural science and people making the research use subjectivity. The research will use a qualitative approach instead of a quantitative approach. The qualitative approach will focus on analyzing secondary data to answer the research questions. A quantitative approach would require the use of primary data, and this is not available for this research

Limitations of Research

The research has limits of providing exhaustive information on using cash flows to value corporations. The goal is to provide an overview of company valuation using discounting techniques, and not disclose private data of corporations.

Key Points Arising

The Key points that arise from the topic on the valuation of companies using cash flows are;

i)The decline in cash flows due to reduced sales occasioned by diminishing purchasing power of households across the globe from the perspective of the business owners.

i)The decline in cash flows due to reduced sales occasioned by diminishing purchasing power of households across the globe from the perspective of the business owners.

The decline in cash flows which is a function of sales has been brought about by the decline in the purchasing power of households which has been as a result reduced incomes on companies and employees across many sectors of the global economy. The restrictions on movement of people and the introduction of curfews to curb the spread of the corona virus has meant that business now have less time open to business operations with a few customers who can physically visit the stores due to movement regulations imposed by the governments in various countries with the support of the World Health Organisation. Companies that were relying on sales through the physical stores without hedging using sales from ecommerce were significantly affected. Other than the consumption by households going down, the Covid-19 pandemic has also affected the business to business sales where companies which sold goods and services to other companies have also been affected as seen from (Stanley et al, 2020).This is because companies are increasingly reducing their budgets to accommodate the reduced sales that have been experienced during the Covid-19 pandemic. The result is that the velocity of money amongst the various companies has gone down thereby resulting in reduced sales and subsequent cash flows for various companies with the same industry and later within other industries in the economy since they depend on each other.

References

CDC. (2021). About Variants of the Virus that Causes COVID-19​​. About Variants of the Virus that Causes COVID-19​​. Retrieved from https://www.cdc.gov/coronavirus/2019-ncov/transmission/variant.html

Craft. (2021). Intercontinental Hotels competitors. Intercontinental Hotels competitors. Retrieved from https://craft.co/intercontinental-hotels/competitors

Das et al. (2020). Investigating the Impact of the Announcement of Loan Moratorium on Stock Prices: Evidence from Indian Public Sector Banks. Investigating the Impact of the Announcement of Loan Moratorium on Stock Prices: Evidence from Indian Public Sector Banks. Retrieved from https://journals.sagepub.com/doi/abs/10.1177/2278682120969014

Gamoyo et al. (2020). The socio-economic impacts of Covid-19 restrictions: Data from the coastal city of Mombasa, Kenya. The socio-economic impacts of Covid-19 restrictions: Data from the coastal city of Mombasa, Kenya. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7499072/

International Labour Organisation. (2020). The impact of the COVID-19 pandemic on jobs and incomes in G20 economies. The impact of the COVID-19 pandemic on jobs and incomes in G20 economies. Retrieved from https://www.ilo.org/wcmsp5/groups/public/—dgreports/—cabinet/documents/publication/wcms_756331.pdf

International Monetary Fund. (2015). G20 ECONOMIC OUTLOOK. G20 ECONOMIC OUTLOOK. Retrieved from https://www.imf.org/external/np/g20/pdf/map2011/map.pdf

Kitimo. (2020). Covid-19 invades banks, slows down earnings. Covid-19 invades banks, slows down earnings. Retrieved from https://www.theeastafrican.co.ke/tea/business/covid-19-invades-banks-slows-down-earnings-3207598

Macrotrends. (2020). Hyatt Hotels Cash Flow Statement 2006-2021 | H. Hyatt Hotels Cash Flow Statement 2006-2021 | H. Retrieved from https://www.macrotrends.net/stocks/charts/H/hyatt-hotels/cash-flow-statement

Macrotrends. (2021). Hyatt Hotels Cash Flow Statement 2006-2021 | H. Hyatt Hotels Cash Flow Statement 2006-2021 | H. Retrieved from https://www.macrotrends.net/stocks/charts/H/hyatt-hotels/cash-flow-statement

Srivastava & Kaushal. (2020). Hospitality and tourism industry amid COVID-19 pandemic: Perspectives on challenges and learnings from India. Hospitality and tourism industry amid COVID-19 pandemic: Perspectives on challenges and learnings from India. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7528873/

Stanley et al. (2020). COVID-19 is changing how B2B buyers and sellers interact. Savvy sales leaders are learning how to adapt to the next normal. COVID-19 is changing how B2B buyers and sellers interact. Savvy sales leaders are learning how to adapt to the next normal. Retrieved from https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-b2b-digital-inflection-point-how-sales-have-changed-during-covid-19#

UNWTO. (2020). COVID-19 Related Travel Restrictions. COVID-19 Related Travel Restrictions. Retrieved from https://www.unwto.org/covid-19-travel-restrictions

US Department of Labor. (2021). Unemployment Insurance Relief During COVID-19 Outbreak. Unemployment Insurance Relief During COVID-19 Outbreak. Retrieved from https://www.dol.gov/coronavirus/unemployment-insurance

US Department of Treasury. (2021). Resource Center. Resource Center. Retrieved from https://home.treasury.gov/

Wharton University of Pennsylvania. (2020). Coronavirus and Supply Chain Disruption: What Firms Can Learn. Coronavirus and Supply Chain Disruption: What Firms Can Learn. Retrieved from https://knowledge.wharton.upenn.edu/article/veeraraghavan-supply-chain/

White. (2020). DCF Valuation: The Stock Market Sanity Check. DCF Valuation: The Stock Market Sanity Check. Retrieved from https://www.investopedia.com/articles/stocks/08/discounted-cash-flow-valuation.asp

Yahoo Finance. (2021). InterContinental Hotels Group PLC. InterContinental Hotels Group PLC. Retrieved from https://finance.yahoo.com/quote/IHG/history?p=IHG

Creswell, J., & Plano Clark, V. (2018). Designing and conducting mixed methods research. Los Angeles: SAGE.

 

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