• Accor narrows earnings target

Accor narrowed its FY Ebitda range at the top end, from Eur820m to Eur850m to between Eur820m and Eur840m, citing the China trade war.
The group remained confident, with CFO Jean-Jacques Morin telling analysts: “We’ve been tested for the first time and the performance shows the strength of the asset-light model”.
Morin added: “The fee growth is supported by a strong pipeline. Europe is doing well, while Asia Pacific is experiencing a decline linked to the situation in China. China remains uncertain even though there is a tentative trade truce, we need to see how that develops.”
Sébastien Bazin, chairman & CEO of Accor, added: “The group once again generated solid revenue growth with steady supply growth and a record-setting pipeline. At the same time, Accor continued to execute its strategy, making progress on the sale of its remaining real estate activities, and on the launch of ALL, the group’s new distribution platform and loyalty programme, in the near future.”
During the third quarter, Accor opened 60 hotels with 8,500 rooms. At end-September 2019, the group’s portfolio totalled 726,345 rooms in 4,946 hotels and the pipeline represented 1,181 hotels corresponding to 205,000 rooms, with Morin commenting that the group expected to reach 5,000 by the end of the year, with net system growth of 5% and “significant openings” in the fourth quarter of the luxury segment.
The company’s pipeline was dominated by Asia-Pacific, with 101,000 rooms, followed by 43,000 in the Middle East and Africa and 41,000 in Europe.
The company reported a 0.7% increase in revpar, with performances varying by region: Europe was relatively resilient, up 1.2%, while Asia-Pacific recorded a slight decline of 1.1%, mainly due to the environment in China. In the UK, revpar growth was 0.4%, with London up 1.6% and provinces more affected by Brexit, down by 0.9%
Consolidated third-quarter 2019 revenue totalled Eur1.05bn, up 4.1% like-for-like. The group’s New Businesses segment reported 3.0% like-for-like revenue growth, with the CFO commenting that, excluding Onefinestay and John Paul, the increase would have been 16%. The company said that D-Edge, Gekko, Very Chic and ResDiary continued to report double-digit revenue growth.
Morin said that the sale of Orbis was progressing and that there would be an incremental return to shareholders. He would not be drawn on how much, but pointed to the Orbis’s Eur1.18bn gross asset value. He also remained tight-lipped on whether any money would be used for M&A. The company had previously ruled out a share buyback.
Accor reached an agreement earlier this year to buy Orbis’s service business for EUR286m, which included long-term management agreements between the parties for all Orbis’s owned and leased hotels. Accor said that the purchase would allow it to “facilitate relationships with investor partners” and “simplify the disposal process for real estate assets by disposing its stake in Orbis, since the transaction will turn Orbis into a pure-play asset-heavy model”.
Early June saw Orbis confirm that it was splitting into two entities; the service business, which included its franchise and management contracts, and its asset-heavy business. Gilles Clavie, president & CEO of Orbis, said: “We appreciate the knowledge and experience of Accor, which will be invaluable in the restructuring process and we look forward to strengthening Orbis position on the real estate hotel market.”
Clavie added: “Over the last decade Orbis significantly increased its business, entered into new countries, developed its hotel portfolio by all operating modes, and became the regional leader. For the last 20 years, Orbis has been supported by Accor, our strategic partner and shareholder. By splitting [the two] businesses and signing a long-term management agreements we will be able to capitalise a value of the asset light part through its disposal to Accor. We will then focus all our attention on Orbis core business i.e. real estate operations, which is in its DNA. Once done, Orbis – a pure heavy asset player – with its portfolio of 72 owned hotels will be ready to start a new era of growth sharing the same strategy with a new shareholder. Orbis has the most valuable hotel portfolio and is ready to focus its strategy and operations on the asset heavy business in hospitality and beyond.”
When the company launched its tender offer in November, Accor said that the deal strengthened its control on Orbis and consolidated its leadership in Central Europe.
Sébastien Bazin, Accor chairman & CEO, told analysts at the company’s capital markets day that the deal was the “continued rollout of the asset-light strategy, replicating the value creation at AccorHotels through the monetisation of assets”.

HA Perspective [by Katherine Doggrell]: And so Accor is the latest company to hail the virtues of asset light and, looking at their results and their pipeline, why wouldn’t it? Except with Accor it’s not quite asset-light as the other big global operators know it, as the group favours management agreements over franchise to a greater extent -a deliberate move, which it says allows it to keep a tighter grip on service standards.
Which takes us on to what it’s planning on doing with all that cash. No to share buybacks (after all, it hasn’t had the tax breaks which its US counterparts were given by President Trump to allow it to indulge in such things) but one can only imagine that some kind of purchase must be in the offing, it’s Accor after all.
One speculating observer of the sector suggested buying a third-party operating company, allowing a close grip on operations, but rapid expansion through franchises. Now there’s an idea.

Additional comment [by Andrew Sangster]: While the bad news was topline numbers there was comparatively good news on the bottom line. Overall, Accor was only indicating a slight nudge down for profitability (Morgan Stanley said it was a 0.6% downgrade at the midpoint).
There was better news in the new business lines – things like D-Edge, Gekko and Very Chic – which are still targeted to be break even by the year end. This was an area that had been troubling shareholders given the write-downs of One Fine Stay and John Paul.
It seems improbable that Accor would buy a third-party operating company (what would it do with the brands of other brand companies and why would it want to dilute the length of its contracts with a batch of shorter-term ones?) but management remains a point of separation with rival global majors.
Accor remains under valued relative to its global major peers and part of this is down to its greater exposure to management. Franchising delivers a far stronger return on capital employed than management contracts.
It may well be the case that management is the smarter long-term strategic play but for how long can Accor resist the siren call of the franchise model? Not for long is my guess.

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