Description

Investment summary

Accor is the fifth-largest asset light hotel group with over 800k rooms globally. In terms of profits it is 4^th after Marriott, Hilton and IHG. Over the past decade its shares have substantially underperformed its peers due to a number of factors including lower unit growth, RevPar dilution from mix shift, poor capital allocation decisions and a derating of its valuation multiples. As a result, Accor now trades at a substantial discount to peers. We believe that things are turning which could lead Accor to strong outperformance over the next few years.

Brief Background

Accor is an asset-light hotel group listed in France with over 800k rooms across 40+ brands spanning all price segments. Most asset-light hotel groups have generated attractive double-digit compounded returns for investors over the past couple of decades through a combination of mid-to-high single digit revenue growth (mid-single digit unit growth+low single digit revpar growth) over a fixed cost base, driving low-teens earnings growth, supplemented with a combination of buybacks and dividends made possible by the very low capital requirements in this business.

The industry is well positioned to continue these trends as branded hotels continue to take share from independents and overall demand for travel accommodation grows. Overall hotel rooms are expected to grow low single digits annually through a combination of flat to negative growth in independent hotels and mid-single-digit growth in branded hotels. Part of the shift is a function of new construction and part is from conversions of independents joining  branded groups. Whilst there is a long list of benefits to converting to branded, we believe the main rationales are: 1) lower OTA costs as the big hotel groups have stronger negotiating power, 2) higher share of direct bookings thanks to brand power and loyalty programs and 3) better funding and financing terms

Why Accor?

Accor has significantly underperformed the other asset-light hotel groups over the past decade due to a combination of lower unit growth, revpar dilution from mix shift to lower tier/budget segments, poor capital allocation decisions (value destructive acquisitions instead of buybacks) and a slower recovery to pre-Covid profitability. Over the past 10 years, Accor shares are flat while Hilton, Marriott and IHG have all compounded at mid-teens rates. Whilst the latter 3 are all in positive territory compared to pre-covid levels, Accor shares are still down >20%.

As a result of this, Accor shares have derated relative to its trading history and even more so compared to the peer group.

On our estimates (we believe consensus numbers for this year are still somewhat too low despite having been upgraded several times so far this year) Accor trades on approximately 17x 2023 P/E and around 11x EBITDA. This compares to Hilton on 24x and 15x or a discount of 33%-26%.

In the 5 years before COVID (2015-2020), Accor traded at an average P/E of 23x and EV/EBITDA of 14x.

Another interesting valuation data point is that on an EV/room basis Hilton’s valuation is nearly 3x Accor. Hilton trades on $40k EV/room vs Accor $14k. A large of part this difference is due to the difference in mix of chain scales. Accor currently has 32% of its rooms in the upscale/upper upscale/luxury segments compared to 63% for Hilton. Accor also has 40% of rooms in midscale and economy where Hilton has basically no exposure (2%). A luxury hotel can generate up to 5x the fees/room compared to an economy segment hotel room (much higher room rate, higher franchise fee %, more ancillary revenues). In addition, Accor has close to €2bn (close to 20% of EV) tied into minority stakes that don’t contribute to profits.

Looking ahead Accor is very strongly positioned

Pipeline mix accretion

Accor’s pipeline today looks very different than a few years ago. 56% of its pipeline is in the Upscale and above segments (compared to 32% of its existing rooms). This means that its pipeline, contains an accretion to revenue per room of at least 3%. In the years pre-2019, Accor’s pipeline mix diluted fee revenue growth by approximately 1.5% per annum. Going forward, the pipeline mix is estimated to add approximately 1% per annum to growth. Conversely, for Hilton the opposite is happening as the company is building new brands to access lower parts of chain scale. 54% of Hilton’s pipeline is below the Upscale segment compared to just 36% of its current rooms. In addition, in China Hilton operates through a partner so it earns lower fee rates. This will dilute fee growth by approximately 1% per annum. Therefore Hilton would need to grow units 2% faster than Accor to achieve the same fee growth rate.

We expect that over the next few years, Accor’s volume growth (units+mix) will at least match Hilton’s and may even exceed it.

Covid recovery

Accor’s geographical split is significantly more skewed to Europe and Asia than peers and it has a higher mix of managed rooms vs franchised rooms. Both of these factors have meant that while earnings power at the other hotel groups have largely recovered to pre-covid levels, Accor is still lagging. To put some numbers on this, Hilton is close 80/20 split towards franchised vs managed rooms, while Accor is close to 60% managed. In a franchised hotel fees are usually generated only on room charges while in a managed hotel you also earn fees on conference rooms, restaurants, the spa, etc. These adjacent streams have been slower to recover post covid but are certainly in full recovery swing now. Geographically, only 13% of Accor’s rooms are in the Americas and Asia is >30%. Hilton is 70% US and just 13% Asia. With China’s reopening this year leading a broader Asia recovery this will drive further revenue and profitability catch up at Accor.

Pre-Covid, in its 2018 capital markets day, Accor projected it would reach €1.3bn in EBITDA by 2023. Now consensus expects this target won’t be achieved until 2029.  We except they will get there in the next 2-3 years.

European conversion opportunity

As mentioned in the introduction, a significant part of the growth in branded hotels comes from the conversion of independents. Due to some historical and structural reasons, the penetration of branded hotels in Europe is only 30% compared to 70% in the US. Some of this gap is due to current structural reasons such as European hotels being on average much older than in the US and many hotels being too small for branded conversion (brands typically look for hotels that have a minimum of 75 rooms). However, over time, the shift in the US will start slowing due to penetration limits. In Europe we are much further from that point. Accor’s strong position in Europe (2x the size of the nearest competitor) with some of the best brands and in particular 8 strong brands focussed on conversions (Ibis Styles and Mercure alone are individually larger in number of rooms in Europe than all the other hotel groups’ European conversion brands combined), puts it in a strong position to take advantage of this lower penetration and drive overall group unit growth long after the US market is saturated with conversions.

Assets for disposal

Accor has a carrying value of €1.45bn of JV/Associate/other financial assets, which contribute nothing to EBITDA. These equate to nearly 17% of the current market cap, and make the stock look ~2 multiple turns more expensive than it would be of the assets were sold. The largest part of that is Accor’s remaining stake in AccorInvest which is carried in the books at €586m. Management has suggested the real value of its AccorInvest stake could be closer to €1bn, which would make the non-EBITDA earning assets worth closer to €2bn. Accor was prohibited from selling its 30% AccorInvest stake until last month.

Shareholder returns

At FY22 results, Accor’s CEO said there is no better investment than buying back its shares. With the EBITDA recovery playing out this year, the company will likely achieve investment grade rating from S&P some time in H2 which will probably be a catalyst for a significant buyback program. There will be >€1bn in headroom to remain below the 3.5x leverage required for the investment grade rating + the disposals of the aforementioned assets (especially AccorInvest) will add another €1bn+ of cash on top. Add €500+ in annual free cash flow and the company could return 40% of its market cap to shareholders over the next 3 years.

Valuation and upside thesis

We expect that over the next 3 years Accor will grow its top line and earnings ahead of the peer group, return significant cash to shareholders and as a result of both of those rerate to its historic multiple of 22-23x P/E and 14-15x EBITDA, more closely aligned with the peer group. This will result in a stock price of ~€74 in 3 years or a 33% IRR (including dividends) from the current price of €33.

Catalyst

• Capital Markets Day on 27 June
• Announcement of Accorinvest disposal
• Announcement buyback program
• accelerating top line and earnings growth