Welcome to the Hotel Recovery, sings Jefferies, which has added hotels to its list of top picks in the leisure sub-sectors.
As the world moves from lockdowns through pent-up demand and on to vaccine-led normalisation, the broker is expecting investors to start switching their bets in the leisure sector.
“Encouraging data puts the focus on hotels for 2022, in our view,” Jefferies said, while adding that it also remains positive on the gaming sector.
According to the broker’s research, mining the data available on search engine queries, positive momentum continues for UK and US hotel searches, while geolocation data – i.e. our mobile devices tracking us and sending the data back to the likes of Google, Apple and Microsoft – shows that the US hotel footfall recovery is continuing. This, Jefferies asserts, ties in with data from the US airline industry where passenger numbers are close to getting back to 2019 levels.
Of the hotel stocks Jefferies covers, searches and web traffic are both on the rise, with web traffic either nearing or now exceeding the pre-pandemic baseline.
“We expect operators with US, domestic and/or leisure exposure to continue to outperform in 2022. We push market consolidation expectations into 2022 too. Asset owners may attract more investor interest in an inflationary backdrop. For better-positioned operators, we expect debate around shareholder returns to re-emerge. After a range-bound 2021, we see a range of opportunities in hotels for 2022, and it becomes a Top Pick sub-sector,” the broker said.
InterContinental Hotels Group PLC has been double-upgraded to ‘buy’ with the price target cranked up to 5,750p from 3,750p; IHG shares currently trade at around 5,050p.
The broker likes the hotelier’s hotel portfolio, with its focus on the US, and has tipped it for accelerated net system growth of 4.8% in 2022 and 5.8% in 2023, which is similar to annual growth rates seen in 2018 and 2019. Jefferies’ analysts now value the company based on pre-COVID earnings multiples highs, in line with its US peers.
“With 95% of profits from fee business and 80% of fee revenue linked to hotel revenues, IHG has the lowest operating leverage,” it claimed.
It also predicts the group will return to paying dividends in 2022, with the broker expecting IHG will pay out a third of its earnings, which based on current forecasts and the current share price suggests a dividend yield of around 2.5%.
Domestically, the broker likes Premier Inn owner Whitbread PLC (LSE:WTB) in the UK. It rates the shares a ‘buy’ and has a target price of 3,600p, versus a current share price of 3,086p.
The company’s £1bn rights issue returned the balance sheet to a position of strength and, with an estimated 24 months or so of “liquidity endurance”, Whitbread is well-placed to take advantage of market share opportunities in Germany and the UK, in the broker’s opinion.
“With thorough government support schemes and liquidity support, we think market consolidation opportunities so far this year have been limited and may have disappointed investors. We think WTB [Whitbread] will need to expand via further acquisition in Germany to gain scale. With government support rolling off in both the UK and Germany, we think 2022 will bring consolidation opportunities for higher-quality assets,” Jefferies said.