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Whitbread: Growth despite a more challenging market

George Salmon | 21 June 2016 | A A A
Whitbread: Growth despite a more challenging market

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Whitbread plc Ordinary 76 122/153p

Sell: 3,311.00 | Buy: 3,314.00 | Change 33.00 (1.01%)
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Whitbread, the company behind Premier Inn and Costa Coffee, has today released a trading update for the 13 weeks to 2 June 2016. Conditions in the hotel sector are a little tougher than first expected, not least because of new capacity entering the market. But good progress for the year as a whole is expected, supported by cost reduction measures the group is enacting. The shares were up around 1% in early trading.

Total group sales were up 8% as expansion continued. Premier Inn grew sales by 8% with 474 new rooms opened in the period. Costa opened another 53 stores, driving sales up 11.5%. On a like-for like (LFL) basis, Premier Inn increased sales by 2.1%, with Costa growing 2.6%.

The smaller Restaurants business delivered total sales growth of 1.4% and LFL sales growth of 0.2%.

Despite sales growth at Premier Inn, Whitbread describe the UK hotel market as soft, particularly in London. Total revenue per available room (revpar) declined by 1.2%, which includes some expected dilution from the group's expansion, while LFL revpar decreased by 0.5%. Occupancy decreased by 1.5% pts to 79.1%.

The group report a good start to the year for Costa. The UK Retail, Enterprise and International divisions all reported low double digit sales growth.

Group CEO Alison Brittain remains confident that the group will make 'good progress for the full financial year' despite current market conditions. Looking forward, the group plan on opening 4,000-4,500 new Premier Inn rooms in 2016/17, with Costa set to open between 230 and 250 new stores and install at least 1,250 new Costa Express machines.

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, meanwhile, 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.

Even though both businesses have expanded recently, Premier Inn and Costa each have less than 10% market share. This should mean that there is still plenty of room to grow, and the group is planning to further increase the estates of both of these businesses in the coming years.

With expansion fully underway, investors will be looking to ascertain if the 'softening' of the UK's hotel market is a temporary blip or if there is any sign of a more structural decline. For the time being, given the general uncertainty within the UK over recent months, we are happy to give Whitbread the benefit of the doubt.

In any case, the group has delivered consistently positive LFL sales growth in a variety of economic conditions. This underscores the strength of its proposition, and should mean that there is excellent visibility of future growth. With Costa busily slaking the nation's never ending thirst for caffeine; think of Whitbread as an investment play on the UK's long hours work culture.

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 plenty of freehold hotel assets, so Whitbread looks capable of funding its growth, without recourse to shareholders.

After spending 2014 and 2015 on higher multiples of more like 20x, Whitbread now trades on circa 15.8x forward earnings, which is back in line with its longer run average.

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.