News & Insights

Company Review: Accor SA

Investment opportunities are created when the market underestimates a business’ long-term earnings power. In the case of Accor SA, one of the largest global hotel operators and owner of some of the industry’s most well-known brands, we believe that investors are overlooking a strategic transformation that has significantly improved the quality and long-term prospects of the Company. As travel recovers in the aftermath of pandemic-related disruptions, we think that Accor’s earnings are likely to grow faster than many are assuming. For these reasons, we own Accor in our Global and International Value strategies.

Accor was founded in 1967 and for much of its history expanded in an undisciplined fashion in hotel ownership and other travel adjacent segments. This was capital intensive, and the returns earned on this capital were poor. Unsurprisingly, the strategy delivered disappointing results for shareholders – over the past twenty years an investment in Accor delivered a total return of 82% (3.0% p.a.) vs. the MSCI World ex-USA Index of 263% (6.7% p.a.).

Approximately 15 years ago Accor began a long – and at times uneven – journey towards improved performance. First, the Company sold or spun off its non-hospitality businesses. Several years later, the Company addressed the lack of breadth in its portfolio by acquiring leading brands in the upper-upscale and luxury segments. Finally, in 2018 the Company took the most important step in its transformation, selling a 70% stake in its owned hotels and converting to an asset-light management company model.

We like this remaining business. Hotel brands deliver higher occupancy and room rates to owners while reducing costs. For example, consider customer acquisition. Independent hotels have become increasingly reliant on online travel agencies for bookings. This is an expensive distribution channel, with powerful intermediaries taking advantage of their position to steadily raise commissions. Branded hotels address this challenge by leveraging their scale to reduce fees, and by offering the potential for increased direct bookings (websites, apps, loyalty programs, etc.).

Today, about 55% of hotels globally are branded, but 90% of hotel new builds are brand affiliated. This is a clear signal of the value proposition. Previously opened independent hotels are also increasingly turning to branded management companies to improve operating performance (a process referred to as conversion). Branded hotel operators are taking market share, which is driving revenue growth above GDP. We believe this type of growth potential for Accor could be achieved with minimal capital spending, resulting in strong reinvestment economics and very good free cash flow generation. As a result of these favorable attributes, hotel management companies tend to trade at high valuations.

Accor is well positioned to potentially benefit from these favorable industry trends. The Company owns 33 hotel brands that span the entire value spectrum. These include some of the largest and most recognizable brands – especially outside of the United States – in their respective segments, including Fairmont, Raffles, Novotel, Mercure, and Ibis. They are winning their fair share of new builds and conversions around the world which has driven growth in room count.

While Accor laid the groundwork for better results several years ago, the Company’s turnaround was short-circuited by the Covid-19 pandemic. In early 2020, travel ground to a halt and hotel occupancy plummeted. For exposed businesses, earnings expectations declined and share prices collapsed. While the near-term outlook at the time was indeed grim, at Hotchkis and Wiley we take a longer-term perspective, recognizing that sometimes share prices overreact to temporary developments. After all, a business’s intrinsic value is the discounted sum of all future cash flows, not just those from the next year or two.  Through this lens, in the summer of 2020 Accor shares looked attractive, and we began buying, confident in both the strength of the Company’s balance sheet and the resiliency of Accor’s business model.

Today, we see that despite substantial evidence of a rebound in travel, expectations for Accor have still not recovered. Estimates for revenue per available room and earnings show a prolonged journey just to get back to pre-pandemic levels (whereas the market is assuming faster recovery at peers). As a result, Accor’s share price performance has stagnated, and the valuation discount to the market and to competitors has widened considerably.

On the other hand, we believe Accor has the potential to deliver better top-line growth and stronger operating margins. This will drive increases in earnings per share and free cash flow ahead of expectations. Given our more optimistic forecasts, the shares look undervalued. Management seems to agree and has committed to return 50% of free cash flow to owners via dividend payments and share repurchases.

CHART 1: H&W EPS Estimates vs. Sell Side

Some of our favorite investments are businesses that are underachieving their potential, with the market price embedding continued weakness, but where we have identified through independent research a likely path to better operating performance. Accor fits this profile, and we are optimistic that an investment in its shares today has the potential to deliver attractive results.

______________________________________
Source: Chart 1 - Bloomberg, H&W

You should consider the Hotchkis & Wiley International Value Fund’s investment objectives, risks, and charges and expenses carefully before you invest. This and other important information is contained in the Fund's summary prospectus and prospectuswhich can be obtained by calling 800-796-5606. Read carefully before you invest.

The Fund may invest in foreign and emerging markets securities, which subjects the Fund to increased risk. Please read the fund prospectus for a full list of fund risks.  

This material is for general information purposes and should not be used as the sole basis to make any investment decision. Views expressed are not intended to be relied upon as research regarding a particular industry, investment or the markets in general, nor is it intended to predict performance of any investment or serve as a recommendation to buy or sell securities. Hotchkis & Wiley (“H&W”) is not responsible for any damages or losses arising from any use of this information.

The portfolio manager’s views and opinions expressed are as of September 1, 2022. Such views are subject to change and may differ from others in the firm, or the firm as a whole. The portfolio manager’s comments may include estimated and/or forecasted views, which are believed to be based on reasonable assumptions within the bounds of current and historical information. However, there is no guarantee that any estimates, forecasts or views will be realized. The security highlighted is intended to be for illustrative purposes only. Information based on a point in time and, therefore, may not be indicative of the security’s current, nor future situation. Any discussion or view of a security, an asset class/segment, industry/sector and/or investment type are not investment recommendations, should not be assumed to be profitable, and are subject to change without notice. In the event of new information or changed circumstances, H&W reserves the right to change its investment perspective and outlook and has no obligation to provide revised assessments and/or opinions. Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness.

Top ten holdings as of 6/30/22 as a % of the Fund’s net assets: Tokio Marine Hldgs Inc. 3.9%, Ericsson 3.8%, BAE Systems PLC 3.7%, BNP Paribas SA 3.3%, ING Groep N.V. 3.3%, Accor SA 3.2%, Points.com Inc. 3.0%, Kosmos Energy Ltd. 3.0%, Royal Mail PLC 2.9%, and Airbus SE 2.8%. Fund holdings and/or sector allocations are subject to change and are not recommendations to buy or sell any security. Diversification does not assure a profit nor protect against loss in a declining market.

Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding; free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets; global Gross Domestic Product (GDP).

The MSCI World ex-USA Index is a free float-adjusted weighted index capturing large and mid cap representation across 22 of 23 Developed Markets (DM) countries, excluding the United States. The index includes reinvestment of dividends, net foreign withholding taxes. The index does not reflect the payment of transaction costs, fees and expenses associated with an investment in the Fund. It is not possible to invest directly in an index.  MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. See Index definitions for full disclaimer.

Investing in equity securities have greater risks and price volatility than U.S. Treasuries and bonds, where the price of these securities may decline due to various company, industry, and market factors. Investing in foreign as well as emerging markets involves additional risk such as greater volatility, political, economic, and currency risks and differences in accounting methods.

Market Disruption: The global coronavirus pandemic has caused disruption in the global economy and extreme fluctuations in global capital and financial markets. H&W is unable to predict the impact caused by coronavirus pandemic, which has the potential to negatively impact the firm’s investment strategies and investment opportunities.

Past performance does not guarantee future results.


Mutual fund investing involves risk. Principal loss is possible.
The Hotchkis & Wiley Funds are distributed by Quasar Distributors, LLC