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Whitbread - Premier Inn growth slows

Equity research team | 26 January 2017 | A A A
Whitbread - Premier Inn growth slows

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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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Both Whitbread's Premier Inn and Costa businesses gained market share in the quarter, with like-for-like sales up 1.7% and total sales up 8.6%, however growth is slowing at Premier Inn. The shares fell 4.2% following the announcement.

Our View

Slowing growth in the division may have caused the shares to wobble after third quarter results, but Premier Inn remains 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, with a rapidly growing overseas presence too. The small restaurants business, which has struggled in recent times, 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 in the coming years.

With expansion 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 post referendum. For the time being, especially given the general levels uncertainty in 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 quenching the nation's never ending thirst for caffeine; think of Whitbread as a twin investment play on 'taycations'and the UK's long hours work culture.

The balance sheet is strong, with plenty of freehold hotel assets, so Whitbread looks capable of funding its growth, without recourse to shareholders. The group is trading more or less in line with its historic PE ratio and offers a prospective yield of 2.5%.

Third Quarter results in detail :

Premier Inn saw total sales increase 9.2% in Q3, driven by a 9.7% increase in rooms after 15 new hotels opened during the year. The group's hotel extension programme helped like-for-like sales grow 1.8%, although contributed to a 1.3% fall in revenue per available room (RevPAR). Conditions in London remained soft, with total Q3 RevPAR falling 6%.

Third quarter sales at Costa increased 12.5%, up 4.3% on a like-for-like basis. The performance benefitted from the timing of the quarter end, which this year ran to the 1st December (2015: 26 Nov), as well as new promotional campaigns. Excluding the timing benefit, like-for-like sales rose 2.9%. The group has opened 186 net new stores worldwide and installed 1,266 Costa Express machines so far this year.

The group's restaurants business saw sales decline 0.9% in the quarter, with like-for-like sales down 1.5%.

Whitbread remains on track to open 3,700 new UK Premier Inn rooms this year, with a committed pipeline of 14,000 rooms. Internationally, the group has signed two new hotel sites in Germany and expects to open 230-250 new Costa shops worldwide, remaining committed to opportunities for Costa in China despite tough trading conditions. The group now expect to install 1,500 new Costa Express machine in the full year (up from the original target of 1,250).

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.