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Whitbread - More rooms and shops continue to drive growth

Equity research team | 25 October 2016 | A A A
Whitbread - More rooms and shops continue to drive growth

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Whitbread plc Ordinary 76 122/153p

Sell: 3,327.00 | Buy: 3,329.00 | Change -7.00 (-0.21%)
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More rooms and shops continue to drive growth

Whitbread saw total revenues increase 8.1% in the first half, driven by expansion in both the Premier Inn and Costa Coffee estates. Underlying earnings per share rose 5.2% with the interim dividend increasing 4.9% to 29.9p. The shares fell 1.6% 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 65,000 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 small restaurants business plays a supporting role to the hotels.

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 London hotel market is a temporary blip or a 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 UK 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 15x forward earnings, slightly below its longer run average.

Interim results

First half total sales increased 8.9% at Premier Inn and 10.7% at Costa, while like-for-like (LFL) from existing stores increased 2.4% and 1.3% respectively.

Group underlying profit rose 5.4% to £307m. That was driven by a good performance from Premier Inn and Restaurants, where profits rose 8.9% to £271.5m, offsetting a 4% decline in Costa operating profit, as increased investment and the National Living Wage hit margins.

Despite continued growth at Premier Inn, conditions in London remain difficult, where LFL revenue per available room (RevPAR) fell 4.3% and total RevPAR fell 6.8%. However, the group continues to expand its footprint in the capital, with sales growth of 4.7% this half and the number of available rooms increasing 12.1%.

Overall the group opened 1,171 new rooms in the first half and is targeting 3,700 new UK Premier Inn rooms, 230-250 Costas worldwide and 1,250 Costa Express machines this year.

Despite economic uncertainty the group expects to deliver results in lien with full year expectations.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.