The business model defines the incentive of how the company create, deliver and capture its value (Osterwalder, A,2010). According to the IHG annual report, IHG mainly uses Franchise in the large market such as in US and Europe region. Differently operates using third-party hotel owner in an emerging market, for example in Greater China and occasionally uses Company-Run Operations in order to drive growth of the brand (InteContinental Hotel Group, 2016). For using franchise have its own advantages and disadvantages, depending on the environment, economic conditions, location, Company Characteristic and also indexed by per-capital GDP stated by Contractor, F.J. and Kundu, S.K., (1998). The firm should carefully recognise which model is work best on many factors, in order to create the best model in particular situation.
As the nature of hotel business is a cyclical business, the economic indicators are widely used to analyse and forecast the several businesses including hotel industry (Choi et al. 1999). Therefore, to use gross domestic product as the indicator for hotel business is reasonable as Arbel and Ravid, (1983) described that there is the relationship between the growth of the business and GDP, making GDP is one of the main and reliable indicators (Arbel, 1983).
US market is the largest market for InterContinental hotel group (IHG) (InteContinental Hotel Group, 2016). As US overview is one of the core factors that drives the company growth supported by (Oxford Economics, 2016). Rauch (2016) stated that hotel industry encourages the impact in economic level in 2015 and hotel business generated around $140 billions of the industry GDP. However, the diminishing in the growth rate revenue per available room in the US, from 6 percent in 2015 to 3 percent in 2016 slow down the economy as well as the hotel industry.
Impact
As Rauch (2017) supports that President Trump will play an important role to change the economic in term of trades, incomes, rules and regulations. Hence, understanding U.S economic condition is very important as well as creating competitive advantaged for the company by fully recognise and prepare the step forward than the competitor.
The Hotel business is leisure business, therefore elderly people are the important target that hotel should be focus and ageing trend could affect revenue unavoidably. As the study of Lago, (1993) ageing population is one of the main factors affect the tourism industry, creating the opportunity for growing in demands. Furthermore, world population expect to rise 3.7 times from 1950 to 2050 and age around 60 increase almost 10 times (David E. Bloom,2011). As mentioned, it implies that the hotel business could capture these opportunities with proper business policy in order to handle the ageing population. As state by IHG that there will be the increase of needs of travel both locally and internationally (InteContinental Hotel Group, 2016).
Another factor that should be attention is the change in price of oil which is essential effect many stock price many industries include tourism-related sectors such as lodging(Kling,1985). This mean that both airline and hotel industry is affected. As supported by Becken, (2011) the travel industry relies on oil price directly and indirectly. The traveler (demand side) could be reduce if the energy price increase due to the higher cost of transportation, on the other side the supply side also affected, due to the higher cost of using energy to operated. Therefore, it is clearly that not only transportation (airline, train) that get influenced but also hotel and lodging. Aware of the price of oil is necessary, the fluctuation and uncertainty of oil are considered as a threat to the travel industry. However, there are the primary shocks toward the price of oil on the demand rather than the supply shock for the U.S. economy (Kilian, L. and Park, C., 2009).
The study of the lodging industry by Arbel, A. and Ravid (2006) illustrated that the energy price indeed negatively impacts the demand to travel, although, not decrease the need of lodging industry. As customer may change the travel mode or number of day per trip and reduce the transaction cost instead. The traveler could change to stay longer in one place rather than having a short stay in many places and waste a lot of high transportation cost.
In terms of the changing in technology trend, as Qiang (2009) suggested that online reviews can impact to the online reservation dramatically, therefore, the company should carefully study developing the generalisation of the customer reviews. Some state that technology can change the customer behaviour in term of reservation ‘way, check-in process and services as describe by Rauch (2016). However, the growth in the technology of the reservation could harmfully affect the reservation channels in the hotel business and company revenue since there are hospitality intermediaries that could ask for high commission, fee and also pay for hotel ranking as stated in Hilton worldwide holding ‘annual report. (Hilton Worldwide Holdings Inc., 2015).
Another main influence that worth observing is the admirable achievement of Airbnb, the online hospitality services which provide accommodation for short-stay travellers. The paper of Oskam, (2016) specified the impact of Airbnb to the hotel industry in many aspects, for example, falling in the hotel rates and stars, hotel values and revenues. The study from (Huston, 2015) claims that hotel may have to reduce their room price because of the effect of Airbnb, making the hotel benefit lower. In the same way with many research such as (Zervas et al.,2015), however, as the same author stated that the growing of Airbnb impact most on lower-ended hotels and hotel without full services. The nature of Airbnb develop growth in tourism but negatively effect on hotel business (Airbnb, n.d.)Nevertheless, it is possible that demands in the high-end hotel could be reduced if they can get the better place with lower cost from Airbnb. Clearly, Airbnb can capture abundance demand from tourism with no limit in supply because of everyone can be renters and leasers via Airbnb. Therefore, the growth of Airbnb is a threat, the hotel cannot ignore.
Evaluating Equity
There are several ways to evaluate the equity, for example, Dividend Discount Model (DDM), Discounted Cash flow models (DCF), Residual income Valuation Models (RIVM). The purpose of evaluating equity is to find the true value of the stock price, helping the investors to make a decision whether to buy or to sell (undervalued or overvalued). Moreover, each method has their own pros and cons. However, the best way of valuation is varying for each company. Each model has different assumptions and the available of data also considered.
• Dividend Discounted Model
The equation:
=
Where is the value of equity at time t (intrinsic value of common equity’ firm), is the expected dividend at time t, is the cost of equity(Schreiner,2007). The last term refers to the forecast price of the share applying with the constant growth at time t. With this way the analyst normally makes an assumption of constant growth rate in long run perpetuity growth to make the model easier to evaluate. Dividend Discounted Model is the method in which evaluating the equity by expected future dividend. This is one of the fundamental methods, it focuses on the actual cash flow only to equity shareholders. Therefore, the analyst is required to forecast the future dividend which hard to defined since it has to depend on the management operation team, consistence forecast is problematic. Note that this model is not suitable for the company that never pay dividend before, or the company which have the negative dividend. Therefore, this could be considered as one of the disadvantages, even this method could be one of the easiest and fundamental ways to evaluate the equity (Penman and Sougiannis, 1998).
Moreover, the Miller & Modigliani (1961) claims that dividend is not appropriate for valuing equity, due to irrelevant of the expected payout’ timing. As DDM mainly focus on the actual cash flow to shareholders which not essential for valuing, the company can borrow money from other financial institutions to cover the dividend payment, creating nothing to evaluate the value within investing activities. (Penman, 2004).
• Discounted Cash Flow Model
Where is the value of equity at time t, is the expected free cash flow at time t+i as the data available at time t, is rate of weighted average cost of capital with is constant, is the market value of net debt at time t. (Schreiner,2007).
As FCF can be calculated by
Where NOPAT is Net operating profit after taxes = EBIT (1-Tax rate).
Change in invested capital = depreciation and – change in working capital – capital expenditure.
OCF is operating cash flows. (Wang,2005)
FCF is the after-taxes cash flow for all type of investors including debt holders and equity holders. There are two ways to calculate FCF to equity, direct and indirect method. The direct method uses free cash flow directly to equity holders discounted by cost of equity. Whereas indirect method, using free cash flow to firm discounted by weight average rate cost of capital (WACC) and deducted by market value of debt as describe in the formula above.
Free cash flow is not influenced by capital structure, however, capital structure determined financial discount rate, weighted average cost of capital and also the intrinsic value.
The DCF analysis is calculated by using a number of estimated future net incomes. This method is calculated on an unleveraged basis (Nilsson, 2002). The advantages of using this method is that DCF can provide a value of equity which is nearest to the intrinsic value of the company ‘asset as it is in FCF (Dun & Bradstreet, 2008). As Gode & Ohlson (2006) stated that discount Cash flow model is the method emphasis only on cash generation to shareholders and lenders instead of focus only on dividend to shareholders as DDM. Free cash flows (FCF) is equal to the dividend if the firm pays no debt and have full payout policy. However, this model has difficulty for the analyst to find FCF for instance, the company that have unclear separation of financing, operating and investing activities, making operating cash flow is hard to define. In Addition, cash flow is not the only factor that considered as wealth to the company. Since earrings are not usually recognised and turn to cash immediately. Likewise, FCF can manipulate by company’ policy such as delayed payment and etc. (Gode & Ohlson 2006).
As seen from the formula above DCF is not reflect the market conditions as it should be considering for valuing the equity, even though, its discount rate is the replication of risk (Nilsson, 2002). In contrast, some researcher states that it is a good point that there is no market condition involve in the formula as (Dun & Bradstreet, 2008) claims that the DCF model is based on the fundamental of the company strength as a result, less depend on the market volatility. Therefore, DCF can give the investor concept of what they can receive when investing in the company.
These could consider as the weakness of the DCF method if analyst fail to recognise its limitation, the analysts should understand the model, its accounting method and company ‘financial policy clearly before using the model.
• Residual Income valuation model
Where is the common equity’ intrinsic value at period t, is expected residual income at period t+1 as the information known at period t, is cost of equity (constant) and is Book value at time t can calculate by net income at time t subtracted by dividend payment in cash to common shareholders at time t and plus book value at time t+1 (Schreiner,2007) which is the clean surplus relationship.
Residual income can be defined by
Where is residual income at time t, is net income at time t, refers to rate of cost of equity (constant), and is common equity book value to equity at a period of t-1. As can be seen in the formula that residual income is the amount of net income of firm exceeds the cost of capital on equity’ book value and could refer to abnormal earning, the value expected from equity holders. As the cost of equity could consider as shareholders ‘opportunity cost invested capital (Schreiner,2007). As (Dun & Bradstreet, 2008, p. 6) said that this model more focuses on the book value of equity rather than actual cash like DCF model.
However, Ohlson (2000) demonstrated that RIVM has limitation need to be considered. With this model, the clean surplus relationship could not be held if expected change in the number of shares occurs (shares outstanding). Especially in perpetuity terms, if not carefully hold clean surplus relationship, analysts could get under-valued valuation from residual income model. One of the basic mistake is applying growth to the final forecast period value instead of using clean surplus relationship.
Moreover, change in a number of shareholders that effect net benefit from capital distribution, making equity approach is not effectively used. The same author further stated that GAAP break clean surplus relationship due to capital contributions are not always accounted in market value. Therefore, focusing on company’ earnings per share making more logic rather than mainly focus on book value and residual income. Moreover, Nilsson, (2002) explained that DCF model is suitable to value equity because of there is residual income included in the method. Conversely, some researcher, BAHA (1993), claims that in order to estimate the market value, residual income is unnecessary.
According to the study of Penman and Sougiannis (1998), all three model discussed above will be the same when payoffs are expected to be infinite. Though, in reality, analysts often apply finite horizontal to the models. Therefore, each model result differently in different finite time, each technique is required in order to get the effective valuation. However, Lundholm (2001) viewed that this will not affect the different between DCF and RI model even if the model has the constraint as Penman and Sougiannis (1998) stated.
Lundholm (2001) argued that the different of DCF and RI model, even though these two model based on the same assumption, in practical analyst usually in getting the different result. The paper stated that these two should be equivalent, the different refer to inconsistency in applying assumption in both two models and also using “incorrect discount rate errorâ€. This intent to maintain the principle that “if carefully done, there will be no different in valuations from these theoretically equivalent methodsâ€