The full-year results from InterContinental Hotels Group were robust enough to cheer investors to making it the strongest performing share price in the FTSE100 index.
But just as the halving of the share price since the summer is overdone, it is hard to understand what yesterday's numbers told us that warranted the upward surge of 7.3% to 828p.
The results presentation contained the same information on strategy that IHG has been putting out since the arrival of Andy Cosslett as CEO in February 2005. In fact, it is the same strategy that started becoming apparent back in early 2003 when the focus was clearly placed on reducing capital intensity.
It was suggested in some quarters that the stock market reaction to IHG yesterday was due to relief in its number. If so, the market is clearly still failing to understand the hotel business.
Hotel trading lags the general economy by roughly two quarters. Given that fears about a downturn only started this summer and, more importantly, there is currently few perceptible impacts in the wider economy of the meltdown in the financial markets, it seems absurd to suggest IHG is "shrugging off" economic worries.
There are good reasons to believe that the new business model of IHG will prove resilient in any downturn but this will be tested in six months time rather than now. In the meantime, it is worth noting where trading is heading right now.
The key indicator is buried in the supplementary information on current trading. Here, figures are given for occupancy of the four quarters of 2007. As the year progresses, the figures turn increasingly negative. Falling or flat occupancy is usually a precursor to a wider slowdown in revpar growth and the trend for the latter was down as the year progressed, at least in the US and the UK.
The point repeatedly made by Cosslett and finance director Richard Solomons during the presentation, however, was that IHG is now much less vulnerable in the event of a revpar slowdown.
While slower revpar clearly impacts on existing business, base management fees and franchise fees will continue largely unaffected. More importantly, the growing pipeline means that new fees will be added bringing enabling IHG to continue to grow its top line in the teeth of a downturn.
Back in 2003, IHG generated 68% of its EBIT via managed and franchise business. Last year, 86% was generated via franchising and management. And in the US, IHG has little exposure to owned EBIT. "In our biggest market we are far less exposed to cyclical swings than most of our competitors," said Cosslett.
The importance of the pipeline of new hotels was emphasised in a slide detailing the source of growth in gross revenue. Back in 2005, existing hotels provided 9% growth and new hotels – due to exits from the system – contributed a negative 1% impact.
In 2006, 2% of growth came from new hotels and 8% from existing hotels. But by last year, 7% of growth was new hotels and 7% existing (although the joint venture with ANA in Japan was four percentage points of the 7% new hotel growth).
During 2007, IHG opened one hotel a day and signed two hotels a day. This much faster rate of signings will see a surge of openings in the years ahead.
IHG reckons there is a lag of something over nine quarters between a signing and an opening with 90% of signings going on to actually open. High initial signing fees, something like $50,000 to $100,000 for a Holiday Inn, means would-be franchisees are clearly incentivised to see the contract through.
And the credit crunch is not, so far, affecting this pipeline. Incredibly, Cosslett said he was not aware of a single hotel that has fallen out of the pipeline as a result of financing issues.
Some 40% of the pipeline is under construction and 70% has financing. Of the planned 2008 openings, more than 90% are under construction.
Net room growth is accelerating. In 2004, growth was negative. It was just 0.6% in 2005, 3.5% in 2006 and 5.2% in 2007. A record 125,000 rooms were signed last year and almost 53,000 rooms were added to the system.
The rate of growth in room numbers means IHG can tighten its standards and 24,000 rooms were taken out of the system last year, giving a net increase of almost 29,000. Cosslett said he expects exits to remain at broadly this level going forward, even with the new Holiday Inn brand standards being introduced. The total pipeline is now an industry leading 226,000.
The newest brand in IHG's portfolio, Indigo, is set to become an increasingly important part of the pipeline. There are at present just 11 hotels open, all in the US, and 63 in the pipeline.
No formal targets were given but Indigo is moving overseas earlier than envisaged by IHG. A property in Canada is already open, a site in Mexico is signed and IHG is close to signing for its first London Indigo, in Paddington.
To boost the roll-out, IHG is committing $100m of capital. But the company stressed it would recycle this in the medium term rather than leave it invested in property.
Recycling of capital is a feature of the wider portfolio. During 2007, £107m was raised via disposals and £53m was invested. A total of £790m was handed back to shareholders in the year, bringing the total handed back since March 2004 to £3.5bn.
A new InterContinental in New York's Times Square has been signed and is due for opening in 2010. This suggests that the existing InterContinental in New York, the Barclay, may be put up for sale. It is one of the four core properties – the others being in London, Paris and Hong Kong – worth together a total of £682m.
IHG stressed any sale would only go ahead once new distribution for the brand in New York was opened. During 2007, the InterContinental brand grew to 149 hotels with 62 in the pipeline. Once the latter are opened, the brand will pass through the 200 barrier for the first time in its history. Cosslett commented that luxury rivals lack the same level of distribution with, on his figures, 106 Four Seasons and 86 Ritz Carltons.
The total property portfolio of IHG on its books now stands at £1.005bn including 11 hotels other than the four core properties. These 11, worth a total of £187m, include five short leasehold properties which will be converted over time to management.
Another key property in the 11 is the Atlanta InterContinental which remains on the market with IHG claiming interest remains strong despite the credit crunch.
Global revpar growth in 2007 was 7% enabling continuing operating profit to grow 19% to £237m. Global constant currency revpar growth was 5.4% in January.