Annual Report for Intercontinental Hotels Group - Essay Example

Annual report for Intercontinental Hotels Group plc for the year ended 31 December The paper discusses the financial performance and position of IHG plc for the year ended 31st December 2011. The data pertaining to the year 2010 are given for comparison.  Since ratio analysis is very important and frequently referred to in evaluation of the financial performance of a company, the paper is structured to start with ratio analysis followed by analysis of the financial performance and position of the company. Treatment of intangible assets in the financial statements of IHG and its compliance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are also covered in this context. Important Financial Ratios Various financial ratios are calculated for the year ending 31st December 2011 along with the ratios for the year 31st December 2010 for the purpose of comparison and the changes during 2011 over the previous year are given which could be useful in evaluating the performance. $ in mn Revenue and Profits 2011 2010 % Inc. Sales 1768 1628 8.60 Operating profit 559 444 25.90 Exceptional items 35 15 133.33 Total operating profit 594 459 29.41 Profit before exceptional items 497 382 30.10 Tax -120 -98 22.45 Profit from continuing operations 377 284 32.75 Exceptional items 83 7 1085.71 Net profit including exceptional items 460 291 58.08 Financial position Good will and other intangible assets 400 358 11.73 Other non-current assets 1990 1952 1.95 Total non-current assets 2390 2310 3.46 Current assets 578 466 24.03 Total assets 2968 2776 6.92 Total current liabilities 860 921 -6.62 Total non-current liabilities 1553 1564 -0.70 Total liabilities 2413 2485 -2.90 Shareholders’ funds 555 291 90.72 Total capital employed 2968 2776 6.92 No. of shares 289472651 Shares issued during the year 1075438 Total number of shares 290548089 289472651 Financial Ratios Earnings per share (EPS) Profit from continuing operations/ 1.30 0.98 Number of shares outstanding ROCE Net income/Capital employed 12.70% 10.23% Operating profit margin (Excl. exceptional items) Operating profit /Capital employed 31.62% 27.27% Operating profit margin (Incl. exceptional items) Total Operating profit /Capital employed 33.60% 28.19% Net profit margin after tax (Excl. exceptional items) Net profit after tax excl. excep. items/Capital employed 21.32% 17.44% Net profit margin after tax (Incl. excep. items) Net profit after tax incl. excep. items/Capital employed 26.02% 17.87% Asset turnover Total sales/Total assets 0.60 0.59 Current ratio Current assets/Current liabilities 0.67 0.51 Acid test ratio Quick assets/Current liabilities 0.64 0.49 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 Price earnings ratio Share price as on 31 December £11.57 £12.43 Share price / EPS 8.92 12.67 Dividend cover Dividend paid to shareholders 148 121 Dividend paid/Net income 2.55 2.35 Revenue per available room Revenue per available room is up by 6.2% Revenue per room has been calculated by the company by dividing the total room revenue by the number of room nights available. Analysis of the financial performance and position InterContinental Hotels Group is a global hotel company, operating seven highly-respected brands internationally. Total number of rooms operating under IHG brands is 658,348 (4,480 hotels). IHG’s portfolio of brands includes Inter Continental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Hotel Indigo, The Holiday Inn, Staybridge Suites and Candlewood Suites. The performance of the management should be viewed in relation to the industry for the purpose of meaningful evaluation. The revenue per available room (RevPAR) an important measure in the industry perspective was up by 6.2% compared to the industry RevPAR growth of 5.9%. Financial performance and exceptional items Total gross revenue from hotels in IHG’s system is up by 8% at $20.2bn. This includes total room revenue from franchised hotels and total hotel revenue from managed, owned and leased hotels (not all attributable to IHG). The revenue is up by 9% at $1,768m and the operating profit margin for the year is at 40.6% up by 4.9% compared to 2010. Operating profit before exceptional items: Group $559m (2010 $444m) The Americas $451m (2010 $369m) Europe $104m (2010 $78m) Asia, Middle East and Africa $84m (2010 $82m) Greater China $67m (2010 $54m). The operating profit includes two significant liquidated damages receipts in 2011; $10m in The Americas and $6m in Asia, Middle East and Africa. The impact of the exceptional items on the operating profit works out to 33.6% including exceptional items and 31.62% excluding exceptional items. Overall, exceptional operating items totaled a net gain of $35m. (Other Financial Information, p.25) Careful control over cash has enabled the company to reduce net debt by $ 206m to $ 538 m (Chairman’s statement, p. 3) as reflected in the overall improvement in various financial ratios. Table 1 IHG: Segmental Revenue and Operating Profit for the year ended 31 Dec. 2011 Analysis of the segmental information The group’s four reportable segments are Americas, Europe, AMEA (Asia Middle East and Africa) and Greater China organized on geographical basis, apart from the central functions which makes it five. Operating profit by Franchised, Managed and Owned and Leased Hotels before overheads as given in the annual report will not give true picture of the profitability in view of overheads at a significant level in the industry. Operating profit has increased in all the reportable segments. RevPAR growth in the Americas and Europe at 7.5% and 4.7% respectively is largely responsible for the robust performance at the operating level by the company. Table 2 IHG: Gross Revenue by Brands in 2011 $ in bn. The performance in central cannot be compared with the other segments. The central overheads are mainly attributed to its support services to the general growth of the business. Total gross revenue has increased by 8% to 20.2 bn in 2011 compared to $18.7 bn in 2010. Total gross revenue cannot be attributed to IHG entirely, as it includes revenue related to hotels owned by third parties. Segmentation in the hotel industry is based on pricing and the type of customers with different expectations. Therefore, analysis in terms of revenue and profits by brands would be more meaningful. Analysis of profitability with regard to the various brands is very essential for the assessment of the performance of the brands. Performance in terms of brands is an important pointer to the future growth of the organization in its various segments. The total gross revenue for all the bands have increased by 8.02% and is in line with the increase of 8% revenue reported. However, the net profit for each brand could not be separately arrived at due to lack of information. The group launched two new brands to exploit untapped market segments, in the midscale segment in the US and in the upper upscale segment in China. There are several hotels in the pipe line in various segments. Therefore, analysis of the financial statements in terms of brands assumes significance in this backdrop. Changes in the accounting policies With effect from 1st January, 2011 the company has introduced several changes in its accounting policies in tune with the changes in accounting and reporting standards. However, the impact of these changes on financial performance or position is insignificant. Also, the company is not required to restate prior year comparatives. Internal reorganization has necessitated changes in the group’s reportable segments. The relevant statements have been restated with prior year comparatives. Dividend history and performance of the stock The growth of the company over the period of time is reflected in its dividend history, which is impressive. Maintaining dividend growth even when there has been slackness in financial performances during the years 2008 to 2010 indicates the confidence of the management in its continued growth. The decrease in price earnings ratio in 2011 is in line with the sentiments prevailing in the capital markets which are largely related to the current economic situation affecting market capitalization in general. Future business and forward looking statements The new hotels in pipe line and embracing technological innovations in hotel bookings and reservations and investments in maintaining the systems are expected to provide impetus to the growth strategies of the group. The future business and forward looking statements is subject to various internal and external factors that include political and economic developments, supply and demand cycle, CSR regulations, information security, and availability of skills and franchise arrangements which may affect the different segments differently. Treatment of intangible assets in the financial statements of IHG Goodwill According to Carlin & Finch (2007, p. 79), while IAS 36 calls for limited disclosure of the assumptions and processes used by an organization which has elected to use fair value as the benchmark for impairment testing, several specific and detailed disclosures are called for in the event that value in use is the basis adopted for the determination of recoverable amount. In IHG books, the excess of cost over fair value at the date of acquisition is recorded at cost. Transaction costs are expensed and not included in cost of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at least annually. (Accounting Policies, p. 79) In reporting of goodwill under IFRS, the goodwill is shown in the balance sheet at cost. This need not be amortized. Only in the case of value impairment, it is written down to the extent of impairment. Therefore, the procedure adopted by the company is in line with the IFRS. Also, the company states that the transaction costs are expensed and losses cannot be subsequently reversed. Other Intangible Assets Software: Capitalization is based on cost. 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. (Accounting Policies, p. 79) The value of Management Contracts: The gain or loss on management contracts capitalized is amortized over the life of the contract from six to fifty years on straight line basis. (Accounting Policies, p. 79) Other intangible assets: These are capitalized and amortized over shorter period relating to the asset or 10 years on a straight line basis. Other intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. (Accounting Policies, p. 79) The company clearly states that the In-house development costs are expensed, if forecast revenue is less than forecast development costs. When the carrying amount of a long term asset exceeds its recoverable amount the concept of impairment needs to be considered. However, if the carrying amount is more than the recoverable amount, the company needs to make assessment annually at the end of the accounting year. The charges involved in this assessment may be small and needs to be expensed. In the case of IHG, it is stated that the intangible assets are reviewed for impairment not annually, but when events or changes in circumstances indicate that the carrying value may not be recoverable. Obviously, this is not the spirit of the regulations, because, the impairments are not considered as long as the carrying amount is more than the recoverable amount. If the carrying amount is diminished over a period of time, but still above the recoverable amount, the diminishment in value is not considered in such cases. This policy needs to be revised. Also, the assessment should be carried out on a consistent basis. Compliance with the accounting and reporting standards  The financial reporting complies with the International Financial Reporting Standards (IFRS) as adopted by the European Union and the financial statements have been prepared in compliance with the Companies Act 2006 and Article 4 of the IAS regulation (Independent Auditor’s Report to the Members of Intercontinental Hotels Group Plc, p. 71) The currency translation reserve was set to nil at 1st January 2004 on transition to IFRS, and the company has followed reporting in US Dollars from this date. The fluctuations in foreign exchange rates caused US dollar to depreciate against sterling at 0.62 per dollar compared to 0.65 in 2010. This depreciation has the effect of increasing the revenue and profits by 6.8% and 24.8% respectively, since the financial statements are reported in dollar terms. References Carlin, T. M. & Finch, N., 2007, Towards a Theory of Goodwill Impairment Testing Choices under IFRS, The Journal of Theoretical Accounting Research, Fall 2007, Volume 3, Issue 1, pp. 74-95. Read More