Top UK Stocks to Watch: IHG experiences ‘most challenging year’ ever

InterContinental Hotels Group suffers during lockdown but is optimistic about the future, HSBC restarts dividends despite profits plunging during the pandemic, Aviva sells its French business, and Frasers Group writes down the value of its properties.

UK

Top News: IHG shares jump on hopes of strong recovery

InterContinental Hotels Group said revenue plunged and swung to a loss during the ‘most challenging year’ ever in 2020 because of the pandemic, limiting travel and appetite for hotel rooms, but said it was optimistic about its recovery prospects.  

The company said revenue fell 48% to $2.39 billion and that it turned to an operating loss of $153 million from a $630 million profit in 2019. Net debt remained broadly stable at $2.52 billion, just 5% higher than at the end of 2019. No dividend will be paid.

‘2020 was clearly the most challenging year in our history, with Covid-19 heavily impacting demand across our industry. 2021 has begun with many of these challenges still in place, with more meaningful progress towards recovery for the industry unlikely until later in the year and dependent on global vaccine rollouts, lifting of restrictions and an acceleration in economic activity,’ said chief executive Keith Barr.

It said it expected to benefit from its focus on domestic leisure and business travel on hopes that people will travel more locally this year rather than abroad. This is particularly important in the US, where 95% of its portfolio is driven by domestic travel within the country rather than incoming arrivals from overseas.

While the outlook remains difficult, IHG is confident its asset-light model, with 71% of its sites franchised out, and the price points of brands like Holiday Inn, can help it outperform its peers and gain market share as the industry recovers this year.

The fact it is still converting hotels into its own brands and building completely new sites, when allowed during lockdown, will also help it capture more share going forward. Notably, its pipeline of work, when all completed, will see IHG manage 42% of its estate and only have 58% franchised.

Where next for the IHG share price?

InterContinental Hotel Group shares have climbed steadily higher from its mid-March low. It trades above its ascending trendline dating back to early April. It also trades above its 50 & 20 sma on the 4 hour chart in an established bullish trend.

The IHG share price broke through strong resistance at 5165, the pre-pandemic high on Monday. Today’s 4% jump higher has seen the IHG share price hit a fresh all time high of 5568. 

However, the price has also tipped into overbought territory on the RSI so caution should be applied before placing aggressive bullish bets as a period of consolidation or an ease back from this high could be on the cards.

Immediate resistance is at 5568 today’s high ahead of 5600 round number as the nulls look towards 6000. 

On the flip side, support can be seen at 5164, the pre-pandemic high prior to 5000 round number and 4960 the20 sma.

FTSE 100 news

Below is a guide to the top news from the FTSE 100 today.

HSBC restarts dividends despite 34% drop in 2020 profits

HSBC said revenue and profits plunged during a tough year in 2020 but that it was restarting payouts because it is ‘cautiously optimistic’ about 2021 as it continues to shift more toward Asia.

The bank said revenue fell 10% to $50.4 billion in 2020 as growth in its Global Markets division failed to offset the impact of lower interest rates. Its net interest margin also contracted 26 basis points to 1.32% because of lower rates.

Adjusted pretax profit plunged 45% to $12.1 billion and dropped 34% to $8.8 billion on a reported basis. Profits were also hit by higher than expected credit losses during the pandemic.

HSBC said it would restart dividends with a payout of 15 cents per share, following in the footsteps of other major banks that have reinstated shareholder returns after being ordered to suspend payouts when the pandemic erupted last year. That is the first payout made by HSBC since October 2019.

‘The board has adopted a policy to provide sustainable dividends going forward. We intend to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards, with the flexibility to adjust EPS for non-cash significant items, such as goodwill or intangibles impairments,’ HSBC said.

HSBC also recommitted to its plans to pivot more towards wealth management in Asia as expected, and said it was ‘exploring organic and inorganic options’ for its US retail banking operations.

HSBC dropped its guidance to deliver a return on average tangible equity of 10% to 12% in 2022 and said it is now aiming to achieve that ‘over the medium term’.

‘We recognise a number of fundamental changes, including the prospect of prolonged low interest rates, the significant increase in digital engagement from customers and the enhanced focus on the environment, and we have aligned our strategy accordingly,’ HSBC said.

‘We intend to increase our focus on areas where we are strongest, increase and accelerate our investments, and continue to progress with the transformation of our underperforming businesses. As part of our climate ambitions, we have also set out our plans to capture the opportunities presented by the transition to a low-carbon economy,’ the bank added.

HSBC said it continues to target an adjusted cost base of $31 billion or less in 2022 as it continues to cut costs across the business, and a $100 billion reduction in risk-weighted assets by the end of next year.

The bank is targeting a CET1 ratio of above 14%, having come in at 15.9% in 2020.

HSBC shares were trading 1% lower in early trade at 427.3.

Aviva sells French business for EUR3.2 billion

Aviva said it has taken a major step forward toward refocusing the business on its strongest markets after agreeing to sell its French business to Aema Groupe for EUR3.2 billion in cash, including EUR1.1 billion of the unit’s debt.

This is part of Aviva’s transformation that will see it concentrate on its main markets in the UK, Ireland and Canada. The deal helps strengthen Aviva’s balance sheet by increasing excess capital by £2.1 billion and centre cash by £2.8 billion. It also ‘realises significant value for shareholders’ by boosting the Solvency II capital surplus by £800 million.

Aviva said the French business is capital intensive and reduces the solvency ratio by removing exposure to interest rate risk from the Eurofonds guaranteed life insurance product. 

The proceeds will be used to reduce debt and invest in long-term growth, with any surplus funds being returned to shareholders. Around £500 million will be used to accelerate repayments due under the internal loan from Aviva Insurance.

‘The sale of Aviva France is a very significant milestone in the delivery of our strategy. It is an excellent outcome for shareholders, customers, employees and distributors. The transaction will increase Aviva's financial strength, remove significant volatility and bring real focus to the group,’ said chief executive Amanda Blanc.

The French business had assets under management of £105 billion at the end of June 2020 and generated a post-tax profit of £33 million in 2019, Aviva said.

The transaction will need regulatory approval but is expected to be completed before the end of 2021.

Aviva shares were trading broadly flat in early trade at 376.1.

Phoenix Group and Standard Life Aberdeen simplify partnership

Phoenix Group and Standard Life Aberdeen have signed a new agreement to improve their partnership and accelerate growth to benefit both businesses.

Phoenix Group bought Standard Life Assurance from Standard Life Aberdeen in 2018 and the pair entered into a strategic partnership as part of the deal to help advance both businesses. Standard Life Aberdeen became an investor in Phoenix Group and today holds a 14% stake.

The two businesses have now entered into a new binding deal that will allow Phoenix Group to control its own distribution, marketing and brands. It will also focus more on utilising Standard Life Aberdeen’s asset management services to help Phoenix grow over the next 10 years. The original agreement struck in 2018 will end. This will see Phoenix acquire the Standard Life brand to help it accelerate growth in areas like savings and investments, while Standard Life Aberdeen will buy Phoenix’s wrap self-invested personal pension, wrap onshore bond and UK trustee investment plan businesses.

‘The relevant marketing, distribution and data team members will transfer from SLA to Phoenix ensuring that Phoenix has full discretion over marketing and communications. This will support the delivery of a more cohesive experience for customers, clients and their advisers. By investing in the Standard Life brand, Phoenix will accelerate the delivery of a broader set of product and service propositions and be better positioned to take advantage of opportunities arising through the shifting landscape of the long-term savings and retirement market,’ said Phoenix Group.

Phoenix Group will also receive £115 million in cash from Standard Life Aberdeen as part of the deal, and it brings and end to all legacy issues related to the original agreement signed as part of the acquisition in 2018.

‘I am delighted that Phoenix now owns all of the Life and Pensions business of Standard Life, including the brand and all distribution and marketing, and we are committed to investing in this business. This will enable Phoenix to accelerate the delivery of a broader set of product and service propositions to meet the financial needs of our customers as they journey to and through retirement. This is therefore a key enabler of our Open business growth strategy and will support the delivery of incremental new business long-term cash generation,’ said Phoenix chief executive Andy Briggs.

Phoenix Group shares were up 0.6% I nearly trade at 713.7, while Standard Life Aberdeen shares were up 0.3% at 327.6.

FTSE 250 news

Below is a guide to the top news from the FTSE 250 today.

Frasers Group to book up to £100 million coronavirus-induced impairments

Frasers Group has warned it could book impairments of up to £100 million to reflect the write-down in value of freehold properties and other assets as a result of lockdown.

‘Given the length of this current lockdown, potential systemic changes to consumer behaviour, and the risk of further restrictions in future, we believe this non-cash impairment could be in excess of £100 million,’ the company said.

Fraser Group shares jumped as the sum was lower than the £124.9 million worth of impairments booked in the first half of the financial year that will end in April.

Fraser Group shares were up 3.5% in early trade at 479.1.

HICL Infrastructure to maintain dividend as portfolio remains resilient

HICL Infrastructure said it remains on track to pay a dividend of 8.25 pence per share in the current financial year and the next one as its portfolio remains largely resilient to the uncertainty caused by the pandemic.

The company, which has 117 investments in infrastructure projects spanning the UK, Europe and North America, said 72% of its portfolio has remained resilient as they benefit from long-term contracts. Just 19% of the portfolio is ‘sensitive to the wider economic performance’, such as High Speed 1, the A63 motorway in France and the Northwest Parkway in the US. All three have had their valuations slashed as travel remains limited during the pandemic.

‘The board has taken the view that a continuation of the current level of dividend is prudent in the current environment. In line with HICL's dividend policy, the company is targeting a dividend of 8.25p per share for the year ending 31 March 2022, which is expected to be fully cash-covered,’ HICL said.

The company said the pandemic continues to weigh on its outlook but that it was focused on ‘successful stewardship of our critical public assets’. It said the long-term outlook remains positive, underpinned by strong institutional demand for core infrastructure assets around the world. HICL said it is willing to capitalise on any acquisition opportunities that arise using the £350 million available under its revolving credit facility.

HICL shares were up 0.7% in early trade at 170.1.

Sequoia Economic Infrastructure raises £173 million in equity

Sequoia Economic Infrastructure Income Fund said it has raised £172.9 million through a placing that was originally announced on February 12.

The fund raised the maximum amount it was looking for and issued 164.3 million new shares at 105.25 pence each, a 4% premium to its net asset value but a 2.3% discount to its share price before the offer was launched.

The new shares equal about 10% of the company’s issued share capital before the placing.

The proceeds are being used to repay debt in order to free up more lending room to fund its pipeline of development opportunities.

Sequoia Economic Infrastructure said it will continue to pay a cash-covered dividend of 6.25 pence per year in four quarterly payouts, and that new investors that have joined the register by participating in the placing will be entitled to the next payment covering the first three months of 2021.

Sequoia Economic Infrastructure shares were down 1.1% in early trade at 107.3.

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