French lodging giant Accor (OTCPK:ACRFF)(OTCPK:ACCYY) has done okay since my previous update last summer. The stock has returned around 25% in that time, which is strong in isolation but represents anywhere between 300 and 1,600bps of underperformance versus US-listed peers.
While this performance means the stock has hit the ~€42 per ordinary share (~$9.30/ADS) fair value target I set back then, results at the business level are also better than I expected. With Accor running ahead of my model and still at a large valuation gap to peers, these shares remain attractive on balance, and I keep my Buy rating in place.
Cyclical Headwinds Still Largely Absent
Something I mentioned in previous commentary was that while hotel stocks are cyclical businesses, there was still latent demand due to COVID that could act to offset the potential negative impact of slowing economic growth. Accor continues to see very little signs of a slowdown, suggesting this may well be playing out. With that, Q4 and full-year 2023 RevPAR of €73 were both up ~15% on 2019 levels. As 2022 was still impacted by COVID lockdowns, particularly in China, this remains a more useful comparison until we cycle cleaner 2023 comps this year.
Record full-year 2023 EBITDA of €1b was a little over 20% higher than 2019 levels, growing ahead of RevPAR as Accor’s hotel base is also around 12% larger than it was before the pandemic (821.5k rooms at the end of 2023 versus 739.5k in 2019). 2023 EBITDA was also around 5% ahead of the mid-point of guidance from last time (~€950m), a further sign of how robust performance has been in the face of headwinds from slowing economic growth.
While EBITDA is now comfortably beyond pre-COVID levels, margin of 20% was still around 40bps below the 2019 level. This is because the relatively small number of rooms belonging to hotels that Accor actually owns or leases contributes disproportionately to revenue compared to the vast majority of hotels that are owned by third-parties and operate under managed or franchised contracts (where EBITDA margins are around 70%). As a result of cost inflation, EBITDA margin in that segment of its business was in the high single-digit region last year compared to around 20% in 2019.
Latent Demand Still To Feed Through
While higher interest rates continue to pose a headwind to economic growth, Accor’s business was still posting resilient numbers at the end of 2023. In Q4, occupancy levels increased in all segments of its business, with the consolidated rate of 65.8% up around 260bps year-on-year.
While improving, this was still around 310bps below the level Accor posted in Q4 2019 (68.9%), as international travel was still 12% below 2019 levels last year. With a full recovery expected this year, this implies latent demand can continue to offset the usual headwinds from the business cycle. As this figure is only based on a ~80% recovery in Chinese international traveler figures as per the last earnings call, I expect this to continue to be a modest tailwind beyond 2024 as well.
As per last time, Accor’s management targets average annual EBITDA growth of 9-12% across the 2023-2027 period. In addition to continuing COVID recovery-driven growth, Accor also enjoys certain structural headwinds that can support this. One of these is linked to its loyalty program, stable of well-known brands and direct sales capabilities (which attracts higher margin revenue than booking though third-party portals). This combination typically results in better occupancy levels, room spend and profitability compared to independent hotels. As a result, global players like Accor are gaining market share as many independent hoteliers opt to convert to branded ones (conversions represented around 50% of openings at Accor last year). This should result in above-average unit count growth over time.
Last year, Accor posted net unit count growth of 2.4%, in line with management guidance of 2-3% growth but below the company’s medium-term target of 3-5%. A point I mentioned in past coverage of peer IHG (IHG) was that higher interest rates could be posing a headwind to unit count growth. The reason for this is that higher rates mean higher funding costs for new hotel construction. This should fade as interest rates begin to normalize lower this year, supporting a modest expansion toward management’s growth target.
Finally, I would note that Accor’s estate still contains a relatively higher share of rooms operating under an owned/leased model (~2.6% of the total) compared to peers like Hilton (~2.1%), Marriott (~0.8%) and IHG (~0.4%). As new hotels will operate under managed/franchise contracts, this ratio should trend closer to peers over time. Because these rooms are also higher margin (as Accor doesn’t incur operating expenses associated with the day-to-day running of these hotels), its EBITDA margin should also expand, further supporting earnings growth.
As mentioned, 2023 EBITDA was around 5% ahead of my model. Furthermore, Accor’s cash conversion (that is, EBITDA to free cash flow) was 59% last year, comfortably ahead of both the low-50s I had penciled in and management’s medium-term target of 55%-plus. As a result, 2023 recurring FCF of €596m was also well ahead of my prior expectations. Looking at consensus, my previous 2024 and 2025 EBITDA estimates also now land around 5% below estimates as Accor’s business is performing better than expected.
Updating for this and increasing my longer-term EBITDA growth by a point (to better reflect the company’s growth drivers outlined above) increases my fair value estimate to just above €47 per share (~$10.20 per ADS). This maps to a circa 13x EV/EBITDA multiple, which would still represent a noticeable discount to its US-listed peers.
Now, I think Accor’s higher mix of rooms operating under managed contracts (55% of the total) makes a discount to peers appropriate. Managed rooms essentially see Accor take a cut of room revenue and a share of underlying hotel profit, as opposed to franchised rooms which simply attract a straight a cut of room revenue. As such, Accor’s earnings profile is slightly more cyclical than peers, with Hilton (~23% managed rooms), Marriott (~36%) and IHG (~28%) all sporting a lower share of rooms operating under managed contracts.
That said, I would note that the valuation gap has actually widened since previous coverage. While this has contributed to Accor’s recent underperformance, it does also make its valuation increasingly attractive relative to peers, with the current share price mapping to a ~12x EV/EBITDA multiple (based on 2024 estimates) versus anywhere between 15x and 18x for peers. With these shares offering a reasonable standalone investment case as well, I see Accor as the most attractive of the global lodging stocks at this point, and on that basis I keep my Buy rating place.
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