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Whitbread - Interim trading statement

Steve Clayton | 8 September 2015 | A A A
Whitbread - Interim trading statement

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Whitbread plc Ordinary 76 122/153p

Sell: 2,478.00 | Buy: 2,480.00 | Change -31.00 (-1.24%)
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Whitbread has released a broadly positive trading statement, ahead of interim results on October 20. Premier Inn has continued to grow sales at a double digit rate, driven by new openings, good occupancy and a degree of RevPAR growth (Revenue per Available Room). The expansion of Costa continues, with sales rising strongly in both absolute and like for like (LFL) terms. Overall group sales rose by 11.1% with LFL growth of 3.3% in the second quarter, to bring the first half totals to 11.8% and 3.9% respectively. The company commented that August trading had been soft, given poor weather, leading to the stock declining circa 2% in early trade.

Our view:

Premier Inn is a great product; a clean comfortable room, in a good location at a sensible price. With over 60,000 rooms in the estate, it is the clear market leader in the UK branded budget hotel sector. Costa is omnipresent on UK High Streets and highways, with a rapidly growing overseas presence too. The restaurants business plays a supporting role to the hotels, but struggles to inspire in its own right.

The planned growth of the hotel and coffee estates gives excellent visibility of growth, much of which is independent of the economic cycle. Premier Inn has delivered consistently positive LFL sales growth in a variety of economic conditions, underscoring the strength of its proposition. Costa is busily slaking the nation's never ending thirst for caffeine; think of it as an investment play on the UK's long hours work culture. Both businesses have growth plans that envisage expansion of around 40-50% in their estates over a five year period.

The stock has retreated by around 15% since the spring, and now trades on circa 18x forward earnings, which is a little dearer than its longer run average of 16x. But there are not that many stocks out there offering double-digit organic sales growth. Premier Inn has been slow to gain traction overseas, but the UK estate's growth has more than compensated. The balance sheet is strong, with net debt expected to be circa 1x earnings before interest, tax, depreciation and amortisation, so Whitbread looks capable of funding its growth, without recourse to shareholders.

The group is asset-rich, with a lot of hotel freeholds on the balance sheet, and it makes net margins, after tax, of around 15%. As we say, there really aren't that many stocks around which offer market leadership, a history of double digit organic growth, strong profit margins earned from a robust balance sheet and which trade on multiples not too far from their longer run average.

Expansion Plans:

Premier Inn opened 800 rooms in the year to date, and expects to open 5,500 UK rooms in the full year, having started with 59,138 UK rooms. A new hotel, just opened in Sharjah UAE lifts the international total by 168 rooms to 1,871.

Costa expects to open around 220 net new stores, after allowing for the closure of c. 60 UK franchise stores in former Esso petrol stations. In addition, 700-800 new Costa Express machines are planned. There are currently 1,992 Costa UK stores, 787 in the Europe, Middle East and India region and 373 in Asia, plus 4,671 Costa Express machines. 41% of Costa stores are group owned, 48% are franchised with the balance run via joint ventures.

Trading Patterns:

Within the group LFL sales totals, August was a relatively weak month, influenced by the weather, and a strong prior year comparative. Premier Inn traded strongly in London, where sales rose 21% on the back of a 20% increase in available rooms. In the regions, Premier Inn grew sales by 9% with a 6% growth in room supply. Restaurants delivered positive LFL sales of 0.6%, which Whitbread claim is an outperformance of the broader market. Costa UK sales rose 15% and 4.0% LFL, with global sales up 16%.

Living Wage:

This is a significant additional cost for the hospitality sector, Whitbread included. The company plans to mitigate it through productivity gains, themselves enabled by enhanced systems and staff training, efficiency savings and some price increases, with more details to be provided at the interim results.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.