InterContinental Hotels Group & Ashtead Group: Liquidity & Cash Optimization Measures Initiated to Bolster Financial Position

During unprecedented times, the blue-chip stocks are strengthening their liquidity position through cash preservatives, cost-cutting initiatives and seeking Covid Corporate Financing Facility. While the London-listed shares soaring today (27^th April 2020, at the time of writing, GMT 9:20 AM) over sign of easing in the outbreak of Coronavirus, we will discuss two blue-chip stocks InterContinental Hotels Group PLC (IHG) and Ashtead Group PLC (AHT). Both companies have released their trading updates today (27^th April 2020). Subsequently, the price of IHG and AHT surged by around 4.12 per cent and 6.50 per cent, respectively (at the time of writing, GMT 9:20 AM). Let’s get a glimpse over their respective business model, financial position, and outlook to understand the magnitude of their latest trading updates.

InterContinental Hotels Group PLC (LON:IHG)

InterContinental Hotels Group is a FTSE 100 listed company which is engaged in hotel business worldwide. Currently, the company has 5,903 hotels and 883,563 rooms under its various brands. It operates hotels by franchising, managing, owning and leasing the properties. The group has 1,918 hotels in its pipeline, comprising 283,043 rooms.

(Source: Annual Report, Company Website)

Operating Segments at a Glance

• Geographic Segments: As shown in the picture above, the group reports its functions across three major regions, namely Americas, EMEAA and Greater China. The group generated nearly 60 per cent of its revenue from the Americas region in FY2019. The major countries of operations are the United States, United Kingdom and China.
• Business Segments: IHG differentiates its revenue streams into the following verticals, comprising Franchising, Managing, Owning and Leading, Central. The Central function includes services related to finance, human resources, sales and marketing and corporate services.

Strategic Progress in 2019

• Two more brands added to its portfolio - Atwell Suites and Six Senses Hotels Resorts Spas.
• Net system size grew from 3.1% in 2016 to 5.6% in 2019.
• 11% growth in downloads of IHG application.
• Over 200 hotels were signed in Greater China under franchise agreements.

Significant Developments of 2020:

• 13^th April 2020: IHG group signed an agreement with 21st Century Hotel for its Shanghai-based property to operate under its brand, Regent Hotels & Resorts.
• 6^th April 2020: As a part of the asset-light strategy, IHG group announced the disposal of its leasehold interest in Holiday Inn Melbourne Airport.
• 1^st April 2020: InterContinental Hotels Group announced that Malina Ngai, as a Director Non-Executive, had decided to step down from her position after AGM 2020.
• 18^th February 2020: From 1^st June 2020, the board of IHG will appoint Sharon Rothstein as an Independent Non-Executive Director.

Financing & Current Trading Update – Reflecting New Financing Arrangements

On 27^th April 2020, the group provided a current trading update and a financing update including a waiver of current banking covenants and provision of additional facilities through the UK CCFF (Covid Corporate Financing Facility).

• The company will further strengthen its liquidity position through a secured new financing arrangement.
• As per the CCFF facilities, which was introduced by the UK Government, the group has issued £600 million in commercial paper.
• IHG has taken total available liquidity to ~$2 billion, which comprises $660mn of the undrawn overdraft facility and $1.35 billion of cash on deposit.
• On 7^th May 2020, the company will release its first-quarter results of the financial year 2020.
• In the first quarter of 2020, the group expect to report that Global RevPAR declined by around 25 per cent, including a decline of 55% in March 2020, in line with the previous Business Update (20^th March 2020).
• In the Greater China region, the company’s trading performance continues to improve, with only 12 hotels are now closed out of 470 hotels.
• From the perspective of the US region, the group is demonstrating tough future performance, with approximately 10 per cent of the hotels are now closed. In EMEAA, IHG has closed around 50 per cent of hotels
• The occupancy level stood at low to mid-range of 20 per cent across the business in comparison with open hotels.

Share Price Performance

Daily Chart as of April 27^th, 2020, before the market close (Source: Thomson Reuters)

IHG’s shares, at the time of writing before the market close (at 9:07 AM GMT+1) on 27th April 2020, were trading at GBX 3,530.73. Stock's 52 weeks High is GBX 5,770.00 and Low is GBX 2,161.00.

Short Term Future Scenario

From the perspective of the market, the entire region, including Australia, has been impacted by the economic slowdown. The hotel industry is facing challenges, driven by the Coronavirus outbreak. In the fiscal year 2019, the company has reported decent financial performance. The company has witnessed its strongest growth in over a decade in net system size. Trading condition is improving in Greater China but facing a tough market in the United States and EMEAA, due to the closure of hotels.

Ashtead Group PLC (LON:AHT)

Ashtead Group PLC is a FTSE 100 listed equipment rental company. The group operates its business under two brands names - Sunbelt Rentals and A-Plant, with a network in the United Kingdom and the United States along with small operations in Canada.

(Source: Company Website)

Vital Statistics of Brands:

• Sunbelt US:
  • 85% of Group Revenue.
  • Operates 773 stores.
  • Employees: 14,126
• Sunbelt Canada:
  • 4% of Group Revenue.
  • Operates 67 stores.
  • Employees: 1,536
• A-Plant:
  • 11% of Group Revenue.
  • Operates 196 stores.
  • Employees: 3,713

Key Performing Indicators in 2019 Against Strategic Priorities

• Physical Utilization: Utilization of A-Plant was 69% (2018: 68%), while Sunbelt US was at 71% (2018: 72%).
• Fleet on Rent: Rose by 20% in Sunbelt US and 3% in A-Plant.
• Safety: Remained flat against 2018 at The RIDDOR reportable rates of 0.34 in Sunbelt US and 0.22 in A-Plant.
• Underlying EPS: Underlying EPS improved to 174.2 pence per share from 128 pence per share in FY2018.
• Return on Investment: Remained flat at 18% against FY2018.

Key Developments of 2020 - Rebranding and Repurchase Programme

• 19^th March 2020: AHT group announced the repurchase of 120,000 ordinary shares at 10 pence each as a part of its share repurchase programme of £500 million. After the purchase, the remaining number of shares in issue is 449,309,833 ordinary shares (excluding Treasury shares).
• 4^th March 2020: The group will rebrand its A-Plant (UK business) brand under the Sunbelt Rentals brand from 1^st May 2020. The business of the United States and Canada were already getting operated under the brand name, Sunbelt Rentals.

COVID-19 Trading Update (as on 27^th April 2020) – Taking Several Actions to Reduce Operating Costs, Optimize Cash Flow, and Strengthen Liquidity Position

• As per the third quarter of 2020, the company was trading in line with anticipations. This scenario is also reflected in the second week of March, with less impact from COVID-19 pandemic. In light of COVID-19, the government has taken several actions, which resulted in a resilient performance of Ashtead in mid-March 2020. This update is telling about the several actions that the group has taken in response to changing circumstances and the impact on current trading.
• To safeguard the stakeholders, the company has implemented a series of actions: restricted travel and meetings, working remotely where possible, provided touchless signature, among others.
• With few anticipations, AHT's locations in the UK, US and Canada stay active and open. In the current scenario, the trading volumes have been impacted negatively, driven by the measures taken to contain the Coronavirus.
• For Sunbelt US, the rental-only revenue increased by 2% in March as compared with the previous year, while the rental-only revenue in April 2020 will be approximately 15% lower than April 2019. This reflects that the general tool business is approximately 18% lower than the previous year. Led by the decent performance in March 2020, the broader-based specialty businesses are expected to increase around 9% against the last year.
• As per these revenue trends, the group’s underlying profit before tax will be approximately £1,050 million in the year ending 30 April 2020.
• During the current period of suppressed revenue, the company has taken prompt action to reduce operating costs, strengthen the liquidity position, and optimize cash flow: reducing planned capital expenditure for FY21, suspending all existing and prospective M&A activity, reducing discretionary staff costs, among others.
• AHT stays in a robust financial position with long-term committed debt facilities.

Share Price Performance

Daily Chart as of April 27^th, 2020, before the market close (Source: Thomson Reuters)

AHT’s shares, at the time of writing before the market close (at 9:09 AM GMT+1) on 27th April 2020, were trading at GBX 1,915.50. Stock's 52 weeks High is GBX 2,797.00 and Low is GBX 1,010.00.

Outlook - Free Cash Flow to Remain Under Positive Zone & Well Above the $460 Million Threshold

Looking forward to the financial year 2021, the group expect gross capital expenditure to £500 million. From March 19, 2020, the share buyback programme was paused. During the unprecedented times, the company has taken several actions, which will serve the Group well with the strength of the balance sheet. In the coming financial year, the Board is confident of generating a strong cash position and strengthen the market share.