Intercontinental Hotels Group Plc - Coursework Example

?Intercontinental Hotels Group plc Review of the Annual report for the year ended 31 December The Annual Report of the Intercontinental Hotel Group for the year ended 31 December 2011 has been analysed to ascertain the financial performance and position of the company. The analysis is made in two parts. 1. Analysis of financial performance based on the results for the year and the overall position of the company in relation to the industry and the previous year 2010 and 2. Treatment of intangible assets in the books of accounts and the financial statements. Financial performance and position of the Group “The big picture is 9 hotel brands, over 153 million guests annually, more than 672,000 rooms in over 4,500 hotels in nearly 100 countries and territories around the world” (IHG website, 2012), The nine renowned brands being Intercontinental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Hotel Indigo, Holiday Inn Hotels & Resorts, Holiday Inn Express, Staybridge Suites, Candlewood Suites, EVEN Hotels, Hualuxe Hotels and Resorts. Performance of the Brands The performance of all the brands during 2011 compared to the previous year has improved (Exhibit – I). Total gross revenue has increased by 8% to 20.2 bn in 2011 compared to $18.7 bn in 2010 for the group as a whole. Exhibit - I $ in bn. However, the performance in terms of cost and profitability in respect of the brands could not be worked for comparison due to inadequacy of details furnished in this respect. Performance can be analyzed with reference to classification of the business into Franchised, Managed and Owned & Leased. 12 months ended 31 December in $m 2011 2010 % Change Revenue Franchised 502 465 8.0 Managed 124 119 4.2 Owned and leased 204 223 (8.5) Total 830 807 2.9 Operating profit before exceptional items Franchised 431 392 9.9 Managed 52 21 147.6 Owned and leased 17 13 30.8 500 4 26 17.4 Regional overheads (49) (57) 14.0 Total Operating Profit 451 369 22.2 It could be observed that operating profits vary considerably due to incidence of expenses and overheads at varying levels. For example, in franchised revenue is up by 8% and operating profit is up by 9.9%, where as in managed hotels it is 4.2% and 147.6% and owned & leased hotels (-) 8.5% and 30% respectively . Key Performance Indicators The key performance indicators measure the group’s progress in the business. The KPIs over the past three years and their growth have been good. Year 2009 2010 2011 Net Rooms Supply 632325 0647161 658348 Gross Revenue ($ bn) 16.8 18.7 20.2 CSR (Green engage hotels) 911 1122 1722 2011 2010 Earnings per share (EPS) 1.30 0.98 Revenue per available room: Revenue per available room is up by 6.2%. (Annual Report, p. 2) The Group’s reportable segments segmental information The reportable segments in the business have been classified based on the geographical locations of the hotels. There are five segments viz. Americas, Europe, AMEA (Asia Middle East and Africa) and Greater China and the central segment. Operating profit has increased in all the geographical segments. Since the central segment carries the burden of general support services provided by it to all the segments, the figures are not comparable. RevPAR growth in the Americas at 7.5% and Europe at 4.7% respectively has contributed significantly for the overall performance of the business. It is important to note that gross revenue includes revenue related to Franchised, Managed and Owned & Leased. 2011 2010 % Change % Change in revenue Operating Profit Americas 451 369 2.2 2.9 Europe 104 78 33.3 2.4 AMEA 84 82 2.4 1.4 Greater China 67 54 24.1 15.2 Central (147) (139) (5.8) 7.7 Operating Profit Before Exceptional Items 559 444 25.9 8.6 It could be observed that as in the case of franchised, managed and owned and leased classification of the business, % change in operating profit is inconsistent with the % change in revenue due to incidence of expenses and overheads in different reportable segments at varying levels. Impact of exceptional items on profitability The operating profit margin works out to 33.6% including exceptional items and 31.62% excluding exceptional items. Overall, exceptional operating items totaled a net gain of $35m. (Annual Report, p. 25) The impact of exceptional operating items on profitability could be worked out as below: 2011 2010 % Change Operating Profit 559 444 25.9 Exceptional Operating Items 35 15 133.3 Exceptional Items as % to Op. Profit 6.26% 3.38% Industry Comparison A comparison with the industry performance is very important to understand the company’s relative position in the industry in respect of efficiency in performance. “Globally, industry revenue per available room (RevPAR), a key industry metric, was up 5.9 per cent, driven primarily by pricing, or average daily rate… IHG performed well over the year with global RevPAR growth of 6.2 per cent, maintaining the Group’s 2010 performance” (Annual Report, p.8). Reduction in debt The company has considerably reduced the debt as revealed in current ratio and acid test ratio as per Annexure - I. “Careful control over cash has enabled the company to reduce net debt by $ 206m to $ 538 m.” (Chairman’s statement, p. 3) Financial Ratio Analysis While no single measure can reliably predict the health of a company, each measure can indicate important strengths and weaknesses” (Johnson, 2002). Ratio analysis is made for the years 2010 and 2011 separately and shown side by side for comparative purposes as per Annexure - I. The ratio analysis covers profitability ratios including and excluding exceptional items, liquidity ratios, efficiency ratios and ratios related to gearing and capital employed. Collier et al (2004) cautions, “financial ratio analysis is complicated for companies that do not readily fall into a single industry.” Changes in the accounting policies The System Fund collected from the hotels for specific purpose by the company for the benefit of all the hotels in the system and does not result into profit or loss to the company, has not therefore been considered under income. The company has consequent upon switching over to international accounting and reporting standards from January, 1, 2011, made several changes in the accounting policies. The monetary impact on profitability or financial position on account of these changes is negligible. The financial statements have been restated wherever it is necessary due to changes in the reportable segments along with the restated figures pertaining to the previous years. Future outlook and forward looking statements The group has planned several hotels in various segments. These hotels in the pipeline and its launch of two new brands in the untapped market segments to exploit the growth opportunities available in the industry are expected to contribute to revenue growth significantly in future. The group’s management is progressive in implementing technologically advanced methods for booking. The group’s strategy of leveraging its brand value for expansion of its activities has paid rich dividends over the period of time, and is expected to continue in future as well. These forecasts are subject to the risks as identified by the management which include political and economic developments, future events that can affect the international travel, supply and demand cycle, changes in technology and systems, availability of talent and other operational risks involved in the business. Dividend history Hussainey et al (2011) found in a study that “A positive relation is found between dividend yield and stock price changes, and a negative relation between dividend payout ratio and stock price changes.” The company has been consistently paying dividends to the shareholders. The company has an excellent dividend history and the dividends to the shareholders have been continuously on rise since 2003, in fact more than doubled during the period from 2003 to 2011. Treatment of intangible assets by IHG Goodwill “Goodwill arises on consolidation and is recorded at cost, being the excess of the cost of acquisition over the fair value at the date of acquisition of the Group’s share of identifiable assets, liabilities and contingent liabilities. With effect from 1 January 2010, transaction costs are expensed and therefore not included in the cost of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.” (Annual Report, p. 79) The company follows the guidelines as provided under IFRS. Under IFRS goodwill is shown under cost and this need not be amortized over a period of time. In the case of impairment, the goodwill should be adjusted for impairment and shown in the books/statements accordingly. Wines et al (2007) state that “the introduction of the requirement for more explicit estimates of fair values subsequent to initial acquisition may introduce increased uncertainty and a lessening of transparency, as the new reporting regime will rely on increased professional judgment by preparers and auditors.” Acquisition costs: “Costs of issuing debt or equity instruments are accounted for under IAS 32 and IAS 39. All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department [IFRS 3.53]” (Deloitte, 2012). With effect from 1 January 2010, transaction costs are expensed by the company and therefore not included in the cost of acquisition in line with the requirement. Other Intangible Assets Software costs are amortized over 3 to 5 years of estimated life on straight line basis. In house development costs are expensed, if forecast revenue is less than forecast development costs. The value of management contracts is amortised over the life of the contract which ranges from six to 50 years on a straight-line basis. In the case of other intangible assets, capitalised and normally amortised over the shorter of the contracted period and 10 years on a straight-line basis. (Annual Report, p. 79) The intangible assets are reviewed for impairment and internally generated development costs are expensed unless forecast revenues exceed forecast development costs and this policy is in accordance with the IFRS. Compliance with the accounting standards and reporting  The financial statements are prepared in accordance with the accounting standards and relevant accounting policies have been applied consistently. According to the Auditors (Annual Report, p. 71) the Group’s financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. The balance in Currency translation reserve of 189 (211 for 2010) represents the exchange differences arising out of translation of monetary assets and liabilities into functional currency. This has been transferred to the currency translation reserve as the statements are reported in US dollars since 1 January 2004 on transition to IFRS. References Collier, H.W., Grai, T., Haslitt, S. and McGowan, C.V., 2004. An example of the use of financial ratio analysis: the case of Motorola. Research Online. University of Wollongong. [online] Available at: [Accessed 12 December 2012]. Hussainey, K., Mgbame, C.O. and Chijoke-Mgbame, A.M., 2011. "Dividend policy and share price volatility: UK evidence", The Journal of Risk Finance, Vol. 12 Iss: 1, pp.57 – 68. InterContinental Hotels Group, 2012. Welcome to our corporate website. [online] Available at: [Accessed 12 December 2012]. InterContinental Hotels Group, 2012. Annual Report and Financial Statements 2011. [online] Available at: [Accessed 12 December 2012]. Jobnonson, M. B., 2002. Competitive Profiling with Financial Ratio Analysis. Competitive Intelligence Magazine. January/February 2002 Issue. [online] Available at: [Accessed 12 December 2012]. Wines, G., Dagwell, R. and Windsor, C., 2007. Implications of the IFRS goodwill accounting treatment. Bond University. [online] Available at: [Accessed 12 December 2012]. Appendices Annexure - I Financial Ratio Analysis Return on Capital Employed ROCE Net income/Capital employed 12.70% 10.23% PROFITABILITY RATIOS Operating profit margin (Excluding exceptional items) Operating profit /Sales 31.62% 27.27% Operating profit margin (Including exceptional items) Total Operating profit /Sales 33.60% 28.19% Net profit margin after tax (Excluding exceptional items) Net profit after tax excl. exceptional items/Sales 21.32% 17.44% Net profit margin after tax (Including exceptional items) Net profit after tax incl. exceptional items/Sales 26.02% 17.87% LIQUIDITY RATIOS Current ratio Current assets/Current liabilities 0.67 0.51 Acid test ratio Quick assets/Current liabilities 0.64 0.49 ACTIVITY RATIOS Asset turnover Total sales/Total assets 0.60 0.59 Receivables collection period Debtors (Trade and other receivables) 369.00 371.00 Total debtors/Sales x 365 76.18 83.18 Payables payment period Creditors (Trade and other payables) 707.00 722.00 Total purchases or cost of sales 771.00 753.00 Creditors/Cost of sales x 365 334.70 349.97 GEARING Total debt/Total equity 4.35 8.54 INTEREST COVER Interest charges (Interest) 64.00 64.00 Earnings before interest and tax (EBIT)/Interest 5.89 4.44 DIVIDEND COVER Dividend paid to shareholders 148 121 Dividend paid/Net income 2.55 2.35 P/E RATIO Share price as on 31 December 2011 ?11.57 ?12.43 Share price / EPS 8.92 12.67 Read More