Accor, the fourth-largest hotel company in the world, announced weak first-quarter sales results that were in line with our expectation for a moderation in like-for-like sales because of weak economic conditions in Europe. Sales declined 1.2% to EUR 1.24 billion, with a 0.1% decline in like-for-like sales (like-for-like sales increased 1.1% adjusted for the impact of an extra day in February 2012). The adjusted 1.1% increase in like-for-like sales compared unfavorably with 2.5% like-for-like sales growth in the fourth quarter of 2012.
The deterioration was driven by increased unemployment in the eurozone, which was at 12% for the first two months of 2013 compared with 10.8% for the comparable period in 2012 (European hotels currently constitute more than 80% of sales).
Like-for-like sales declined in France, Italy, Spain, and the Netherlands, with only Germany, the United Kingdom, and Belgium generating growth. We note that the like-for-like sales increases in Germany and the United Kingdom were driven entirely by increased room rates amid a decline in occupancy rates, and in our view, the company will have difficulty in sustaining room rate increases in the two countries as the year progresses, unless occupancy rates stabilize.
The first-quarter sales results do not cause us to change our fair value estimate of EUR 38 or our narrow economic rating. We continue to view Accor as undervalued, with the stock trading at a 34% discount to our fair value estimate and a current-year enterprise value/EBITDA multiple of 8.4 times (compared with an average of near 12 times for other global hotel operators we cover). While we view the stock as undervalued, we think it may trade lower in the near term, given our expectation of a continuation of increased unemployment in the eurozone, and we would wait for a more attractive entry point of below EUR 23 (a 40% discount to our fair value estimate). In our view the stock will be challenged in converging toward our fair value estimate until unemployment in the eurozone exhibits signs of stabilizing and the market pays greater attention to Accor’s shift toward hotel management and franchising.
In a positive, the company continued to make progress in its “Asset Right” strategy of shifting more toward hotel management and franchising and away from hotel ownership. Fees from managed and franchised hotels increased 18.2% in the first quarter, driven by 4,628 new room openings, 85% of which were for managed and franchised hotels. The company signed contracts to sell or restructure terms for 22 hotels, including the sale of the Sofitel Paris Le Faubourg (and conversion of the hotel to a management contract), at an enterprise value of EUR 113 million.
We expect the Asset Right strategy to enable the company to significantly improve margins and returns on invested capital, lower capital expenditure requirements, and reduce cyclicality over the course of the next several years and, in the long term, to be a major catalyst for the stock. In the near term, though, we continue to expect economic conditions in Europe to be the primary driver of the stock price and to overshadow the company’s positive shift toward hotel management and franchising.
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