InterContinental Hotels Group
InterContinental Hotels (LSE: IHG) today announced that it sold its Hong Kong hotel for $938 million (approximately £605 million). The sale is part of the hotel group’s transformation to becoming asset-light, by selling its property assets from its balance sheet. By operating hotels as opposed to owning the properties, IHG is able to generate higher returns on equity and return more cash to shareholders.
IHG seems to be selling its Hong Kong flagship hotel near the top of the market, allowing it to secure an impressive valuation of 22x operating profits. It will also continue to operate the hotel, by retaining a 37-year management contract for the hotel.
Since 2013, IHG has sold almost 200 hotels, raising gross proceeds of almost $8 billion, and returning more than $10 billion to its shareholders. Combined with proceeds of recent sale of InterContinental Paris – Le Grand, IHG could return an additional £1 billion to shareholders in 2016.
Shares in IHG rose 3.1% to 2,684 pence by morning trading. With analysts forecasting adjusted EPS growth of 13% to 114.6 pence in 2015, IHG currently trades at pricey forward P/E of 22.5.
Petrofac
Petrofac (LSE: PFC) won a major contract to build an oil pipeline in Kuwait, worth $780 million. The company’s engineering, construction, operations and maintenance (ECOM) division has secured many large orders, causing growth in its order book to outpace its rivals in the oil services sector. This is because of its focus on onshore developments in the Middle East, which has seen continued investment in new upstream and downstream projects, despite lower oil prices.
The company’s upstream earnings is likely to drag earnings lower though. Analysts expect underlying EPS will fall by 51% to 54.1 pence this year, which gives it a forward P/E of 18.8. Despite continued ECOM orders, Petrofac’s earnings outlook will remain relatively unattractive without a substantial recovery in the oil price.
International Airlines Group
Shares in International Airlines Group (LSE: IAG) rose 2.6% to 528 pence in morning trading, after Ryanair (LSE: RYA) said it would accept the airline group’s offer for its 30% stake in Irish carrier Aer Lingus (LSE: AERL).
This clears one of the last hurdles that could hold back a takeover from IAG. All the stands in the way of the tie-up is regulatory approval from Europe’s competition authorities. But, since regulators have allowed similar tie-ups in the past, it does not seem that regulators would block the deal or impose any strict conditions.
One of the main attractions of Aer Lingus to IAG is that it will gain Aer Lingus’s 23 valuable slot pairs at Heathrow. The airline group is looking at combining services to free up slots at Heathrow for more profitable long-haul routes; and expanding Aer Lingus’s long-haul route network, potentially transforming Dublin into a major European hub for transatlantic travel.
Building up Aer Lingus will take some time and require substantial investment costs; but IAG’s near term earnings outlook is attractive too. With a turnaround of of passenger numbers and cost savings with its Spanish operations, underlying EPS is set to grow 75% this year. Its forward P/E ratio is just 10.2, and analysts expect it will pay a prospective dividend yield of 2.3% this year.