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Whitbread - Interims - Double-digit revenue, profit and dividend

Steve Clayton | 20 October 2015 | A A A
Whitbread - Interims - Double-digit revenue, profit and dividend

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Whitbread plc Ordinary 76 122/153p

Sell: 2,503.00 | Buy: 2,505.00 | Change 31.00 (1.25%)
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A very solid set of numbers from Whitbread, with sales up 11%, profits and EPS up 14%, whilst the interim dividend jumps 13% to 28.5p per share. Like for like sales growth at Premier Inn was 5.0%, whilst Costa's UK stores delivered 4.4%. As usual, Restaurants were solid, but dull, with LFL growth of 0.1%. Return on capital edged up to 15.9%.

Hotel & Restaurants underlying profits rose by 10.8%, whilst at Costa, profits leapt up by 28.4%. Outgoing CEO Andy Harrison commented that the second half has begun with a similarly strong performance so far. Whitbread remains on track to hit its growth targets for both 2018 and 2020, with the current year expected to see 5,500 new rooms open at Premier Inn and 220 new Costa stores worldwide. Future organic growth is expected to be funded from Whitbread's own resources and they expect the strength of their return on capital to "create substantial value for our shareholders".

Some value was created by the results - the shares rose 2% in early trading.

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 10% since the spring, and now trades on circa 18.5x 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 1.1x 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.

Key Details:

Hotels & Restaurants - revenues rose 9% to £927m, led by Premier Inn, which grew 13%, whilst Restaurants added 1% to their sales, which Whitbread claim is ahead of a dull wider market. Profits rose 11% and a return on capital of 13% was generated.

The group will invest around £600m this year, with around £130m of this being spent on refurbishment and improvements, the rest on growth. 84% of bookings now come in online. The hotels delivered 10.5% sales growth in the regions, whilst London saw 21% growth after a strong increase (21.5%) in available rooms.

The trial "hub by Premier Inn" property in St Martin's Lane is performing well, with occupancy of 95.6% and TripAdvisor ratings of 4.5, slightly ahead of the overall Premier Inn score of 4.3.

The German expansion progresses, with a first opening in Frankfurt expected in March 2016, with around two hotels a year expected for the next few years as the experiment is tested.

In Restaurants, 56 Beefeaters have had a refurb, for which we can all be grateful.

Costa Coffee - there are now 1,999 Costa stores in the UK, and the company see scope to push this to 2,500 by 2020, focusing on retail parks, drive thrus, contract catering locations and travel hubs. The Costa Enterprises division, which runs the estate of Costa Express machines added around 10% to its estate and sees longer term growth potential to go toward 8,000 Express units, from 4,708 currently. Overseas, Costa sales grew by 14% in the EMEI region, whilst Asia is still delivering LFL growth, despite the slower Chinese economy.

Whitbread expect that the new National Living Wage will add £15-20m to their cost base over the next five years, which they regard as just another of the inflationary costs the business is well accustomed to dealing with. They had already increased Barista pay by 10% to a level above that of the NLW.

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.