Accor’s Demand Stout but Inflation Is Impacting Its Near-Term Profitability

Business Strategy & Outlook

While the coronavirus and geopolitical conflict present near-term demand headwinds, the Accor to expand share in the hotel industry over the next decade as a result of its solid loyalty and exposure to the millennial traveler through its growing lifestyle brands, supporting its intangible brand asset advantage, the source of its narrow moat. As a result, the Accor posted more than 3%-unit growth on average over the next 10 years, well above the roughly 1% long-term industry rate in its core European region (58% of total hotels in 2021). Accor’s growing room share is being driven by an increased presence in higher-end luxury/upscale rooms, which were 27% of its total in 2021. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against Airbnb and other alternative accommodations.

The European travel to rebound in 2022-23, aided by the region’s increased vaccination rates and an ingrained desire to travel. The Accor positioned to benefit from such a recovery, given most of its hotels are in Europe, and given the company’s pracademic (2017-19) revenue per available room growth in the region exceeded the industry rate, driven by its intangible asset advantage. This recovery despite the Russian invasion of Ukraine, where around 1% of Accor’s portfolio resides. Accor sold a meaningful portion of its owned assets in 2018-19, leaving the remaining company with 98% of its rooms tied to asset-light franchise and managed business as of the end of 2021, up from 58% of the mix in 2014. These asset-light rooms offer high returns on invested capital and contract lengths of 30 years that are costly to terminate, resulting in a switching cost advantage for the company. Additionally, recent asset sales have helped provide the company enough liquidity to operate into 2023 at near zero revenue demand levels, even before tapping upon its remaining EUR 1.76 billion revolver or needing to raise financing.

Financial Strengths

While the pandemic makes near-term industry travel demand uncertain, Accor’s financial health is far clearer. By calculating that since 2018, Accor’s disposal of owned assets and investments has provided between EUR 6 billion-EUR 7 billion in cash, which provides the company with enough liquidity into 2023 at near zero revenue generation, even before tapping the remaining availability on its EUR 1.76 billion under its revolver. Accor’s debt/adjusted EBITDA turned negative in 2020, as the pandemic stalled demand, but EBITDA turned slightly positive in 2021, as demand rebounded and Accor executed on removing fixed and variable costs out of its business. This compares with 2019’s 4.5 times level. As demand continues to recover, the Accor’s debt/adjusted EBITDA reaching 4.3 and 3.5 times in 2022 and 2023, respectively. Accor has suspended dividends and share repurchases until demand visibility improves, which one believe is being done out of extreme caution–not out of necessity. The dividends and share repurchase to resume in 2023. Accor’s EBIT/interest coverage ratio was 9 times for 2019, and then turned negative in 2020, followed by a move back into positive territory in 2021. Its coverage ratio reaching 4.7 and 6.6 times in 2022 and 2023, respectively. The Accor will generate EUR 2.3 billion in free cash flow over the next five years, which gives us confidence in its ability to meet the EUR 1.5 billion in debt obligations during that time.

Bulls Say

Accor’s mid-single-digit share of hotel industry rooms is set to increase, as the company controls about 10% of the rooms in the global hotel industry pipeline.
Accor’s recent investments (Fairmont and Raffles, Mantra, Mantis, Movenpick, and Atton) have diversified it in the attractive growth segment of international luxury brands.
Accor has sold the vast majority of its Hotel Invest (owned assets) portfolio in 2018-19 and Orbis and Movenpick owned portfolio in 2020, which leaves a more asset-light company with higher margins.

Company Description

Accor operates 778,000 rooms across over 40 brands addressing the economy through luxury segments, as of Dec. 31, 2021. Ibis (economy scale) is the largest brand (37% of total rooms at the end of 2021), followed by Novotel (14%) and Mercure (15%). FRHI offers additional luxury and North American exposure. After the sale of the majority of Hotel Invest (owned assets) in 2018-19, the majority of total EBITDA comes from Hotel Services (asset-light). Northern Europe represents 21% of rooms, Southern Europe 23%, Asia-Pacific region 31%, Americas 13%, and India, Middle East, and Africa 12%. Economy and midscale are 73% of rooms.

(Source: Morningstar)

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