Accor Stock: Relatively Cheap Valuation, Strong Secular Tailwind (OTCMKTS:ACRFF)

Investment summary

My recommendation for Accor (OTCPK:ACRFF) is a buy rating. Operating chain hotels have better unit economics than independent hotels, and I believe ACRFF is best positioned in the industry to take advantage of this secular trend in Europe. ACRFF also has a very visible growth outlook, where the current rooms in its pipeline represent 26% of total rooms (easily supporting 5% room count growth). Also, ACRFF is trading at a very attractive multiple compared to peers, which gives more room for upside.

Business Overview

ACRFF is an asset-light hotel franchisor business with 821 thousand hotel rooms across a broad portion of the pricing spectrum, in premium, midscale, and economy (“PME”), as well as lifestyle and luxury. ACRFF’s main earnings come from the fees it charges franchises and hotel owners that it helps manage hotels for. A small part of the portfolio (<3%) is owned & leased by ACRFF (a similar business as a traditional hotel business). Segment wise, the hotel services franchise model represents 96% of the group’s EBITDA; hence, this segment is where investors should focus.

Large chain hotels should continue to capture share in Europe

Unlike the US, where the majority of hotel rooms are operated by chain hotels, the majority of hotel rooms in Europe are operated by independent hotels, and I believe this represents a massive opportunity for chain hotel operators like ACRFF to continue growing. The growth will come from either ACRFF (or other chain hotels) growing organically by opening more hotels or independent hotels converting themselves into part of a chain hotel.

One main reason why I believe hotel operators and owners will demand more chain hotels is because the unit economics are much better than those of an independent hotel. Hotel operators get to enjoy more direct traffic and bookings, as chain hotels have a strong brand loyalty program that incentivizes consumers to book directly (they want to collect points and enjoy the benefits). This is extremely important because indirect traffic and bookings are very costly for hotels, and typically, they come from online travel agencies (“OTA”). This cost could go up to as high as 30%, which heavily impacts profitability as a hotel is a business with a lot of fixed costs. This cost is particularly high for independent hotels that have little negotiating power as they lack resources to effectively distribute their rooms (i.e., they lack marketing capabilities to acquire bookings directly; hence, they rely on OTAs to distribute their rooms).

The other benefit of having more direct traffic/bookings is that hotels can acquire more first-party data on consumer preferences (what type of rooms, which days of the month/year are preferred dates to travel, family or single, etc.). These enable hotels to better curate products (bundles, events, etc.) to improve the loyalty program and thereby drive more direct bookings.

On this front, ACRFF has done an excellent job, and the results speak for themselves. ACRFF hotels have continued to gain traffic share from OTAs, with the percentage of direct bookings growing to >70%. The impacts on unit economics are prominent, as these loyal members tend to stay twice as long with ACRFF and spend 10% more per night. The stats also show that by converting these consumers into members, the percentage of bookings goes up to 87%. As this percentage goes up, I expect it to give hotels more negotiating power against OTAs to ask for lower take rates, which further improves unit economics.

Other reasons why operating a chain hotel is better include better revPar vs. an independent hotel, better financing and capital as creditors are more confident that the hotel will do well relative to an independent hotel, and a better occupancy rate.

Indeed, this trend is already happening, as can be seen over the years, and I believe this trend will continue for the foreseeable future as chain hotel players have stepped up their plans to expand in Europe. A very good precedent is Europe’s neighbor, the US, which has most of the hotel rooms now being operated by large brands.

The UK and Germany are leading the way on European hotel development, with over 1,000 new hotels expected to open between 2024 and 2028, accounting for 40% of the total hotel pipeline. Over half of the upcoming European hotel projects are associated with branded hotels, signifying an increase from the 40% recorded YTD. Tension between investor caution and the continuously improving performance report by CBRE

I believe ACRFF is very well positioned to take advantage of this trend in Europe compared to its US peers because it has a much stronger position in Europe. The strong brand reputation that it has cultivated over the years should put it in a better position to convince hotel owners and operators to adopt its brand.

Very positive growth outlook

Hence, I am very positive about the ACRFF growth outlook ahead. The best thing is that this growth is visible and trackable. As of the latest available data, ACRFF has 225 thousand rooms in its pipeline, which represents ~27% of its total room base. Over the past five years, ACRFF has grown its total number of rooms by ~5%/year, which is about 34 thousand rooms a year. Given that there are 225,000 rooms in the pipeline, I would think that growing the total number of rooms by 5% a year is easily achievable. Extrapolating the RevPAR trend from the latest quarter, this bridges to total revenue growth of low-to-mid-teens percentage easily.

One important aspect that I observed was that the delta between pipeline growth and total number of rooms growth has turned positive (4.2% vs. 2.4% in FY23). This is the first time since COVID happened, which suggests that the underlying demand for ACRFF brands has improved significantly. I believe this is a very strong leading indicator of ACRFF growth over the next few years.

Valuation

I model ACRFF using a forward EBITDA approach, and using my assumptions, I believe ACRFF is worth $64. With the ongoing trend and recent operating performance, I model ACRFF to grow topline at 10% over the next three years. Growth visibility can be easily tracked against rooms in the pipeline and pipeline growth; as such, I believe 10% is very plausible. As for margins, I am not assuming any margin step-up, as ACRFF has historically operated around a 20% EBITDA margin pre-covid. Using these assumptions, I expect ACRFF to grow EBITDA to ~EUR1.35 billion in FY26.

Here is where it gets interesting. Given that ACRFF has better exposure to the trend in Europe than its US peers (Marriott, Hilton, Hyatt, and Intercontinental Group), it has the lowest multiple among them, at 10x forward EBITDA vs. Marriott at 16x, Hilton at 18x, Hyatt at 15x, and Intercontinental at 16x. This is despite ACRFF having higher EBTIDA margins than Marriott (18%) and Hyatt (13%) and a similar growth profile as Hilton (low-teens top line expected growth). Hence, I believe there is a strong case to believe that multiples could go up to mid-teens. In my model, I hold a more conservative approach, assuming that ACRFF will at least go up to low teens.

Risk

Although ACRFF’s growth is tied to the demand from hotel owners and operators to franchise its brand, the true underlying demand is still from consumers. If consumer spending stays weak, demand from hotel owners and operators will weaken as well. In addition, any event that stops consumers from traveling will impact earnings too, as can be seen from the pandemic.

Conclusion

My view for ACRFF is a buy rating. I believe ACRFF will benefit from the ongoing shift away from independent hotels, driven by the superior unit economics offered by major brands. The number of rooms in the pipeline remains robust and should enable ACRFF to grow the total number of rooms by 5%. This, combined with the recent encouraging revPar growth, should easily bridge to 10% top line growth. Lastly, ACRFF is also trading at an attractive valuation relative to peers.

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