Accor, geographic winner

Four reasons to be positive on Accor:

• Balanced geographical presence, avoiding all the problematic areas
• Strong balance sheet after adopting a pure asset
• Light business model
• Complex capital structure with shareholders from three different continents
• The stock has previously been over-penalised by its weak return on investment in new business and increased costs in marketing

AccorHotels operates in 100 countries, with 47% of its hotels in Europe, 30% in ASPAC, 9% in MEA, 8% in South America and 5% in NCAC.

Accor has previously agreed with Orbis the key terms of the acquisition of the hotel services business for €286m and will start the disposal of Orbis’s real estate operations.
Accor currently holds an 85.8% stake in Orbis. The gross asset value of Orbis (based on the company’s FY18 results) came to €1.18bn (excluding corporate overheads).

Accor’s capital mainly comes from three different continents: Chinese Jin Jiang and Hua Zhu hold separately 12% and 4.6% of capital; Qatar Investment Authority holds 10.44% and European Kingdom Hotels LCC has 5.84% of the capital.

Accor’s stock has previously been penalised by the weak return on investment in new business and increased costs in marketing, with investors blaming Accor for dipping into its purse for the useless activity.

However, Accor still has very solid fundamentals. In particular, the group will benefit from its attractive widespread geographical presence whilst there are several current uncertain macro scenarios.

Drop in the number of travellers to the US

The trade war between the US and China is likely to have a significant impact on the number of Chinese arrivals in the US. China’s own travel alerts for the US, along with the toughened US approach to approving visas, have both significantly dragged down the numbers of travellers to the US.
As a reminder, the imbalance between supply and demand growth has already led RevPAR to grow at a slower pace in the region, and the recent contraction in numbers of travellers to the US should make RevPAR even weaker.
Unlike its peers (IHG, Marriott, and Hilton) which have a significant presence in the region, Accor has only a 5% exposure to the North American market. The slowdown in RevPAR in the US should be fully offset by the rebounding European lodging market.

Limited exposure to Brexit

The decline in consumer confidence resulting from the political and economic uncertainties related to Brexit has significantly impacted the demand for accommodation in the UK regional market. Although Accor has half (47%) its activity in Europe, the group has a relatively limited presence in the UK. Compared to Whitbread, which has most of its hotels in the UK regional market, Accor concentrates only on the leisure segment and is mainly located in London. Despite the weak demand in the regional market, RevPAR growth has continued its strong positive momentum in London, benefiting from the strong rise in the number of inbound travellers.

Focus on Brazil

And lastly, South America has long been the US travellers’ holiday favourite. However, the lingering seaweed issue in several popular beaches, along with travel warnings from the US government to several South America countries, have significantly impacted the number of tourists to the countries. Luckily, Accor has 83% of its South American business in Brazil, where there is less of a seaweed problem and, most importantly, with a new country leader, security conditions are likely to improve gradually, and we do not see any significant political threat in the short term.

Strong financial position

The group has a very ample balance sheet after moving to an asset-light mode. Following the monetisation of 58% of AccorInvest for €4.6bn, which fuelled several valuable acquisitions (Mantra, Mövenpick) recently, Accor has just announced that it has agreed with its Polish arm, Orbis, the key terms of the acquisition of the hotel services business for €286m and it will start the disposal of Orbis’s real estate assets, which are valued at around €1.0bn.

Special ownership structure could provide an additional spark

Following Accor’s business in China becoming more and more dependent on Hua Zhu, the invisible tension with Jin Jiang could be triggered at any moment. As a reminder, Jin Jiang is still the group’s largest overseas shareholder with 12% of the capital and voting rights of over 16%. Hua Zhu holds 4.6% of the capital with 3.6% of the voting rights at the end of 2018. Unlike Hua Zhu, Jin Jiang is backed by the Shanghai Municipal people’s government and, after the acquisition of the Radisson Hotels Group and Louvre Hotels Group, the hotelier has revealed its ambition to become the world’s largest hotel operator in the coming years.

We have very low visibility regarding what path Jin Jiang will take. However, any unpredicted move by the group’s Chinese shareholders should lead to speculation on the stock.