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Whitbread - Steady 2016, but headwinds ahead

Nicholas Hyett | 25 April 2017 | A A A
Whitbread - Steady 2016, but headwinds ahead

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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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Whitbread delivered another year of growth in the 12 months to 2 March, with revenues up 8.2%. Underlying earnings per share rose 6% to 246p, while the group announced a final dividend of 65.9p per share, pushing dividends for the full year up 6%. Both earnings and dividends are broadly in line with analyst expectations.

The shares fell 6.5% following the announcement, with the group warning on a tougher consumer environment and its impact on Costa.

Our View

20 years ago over 50% of Whitbread revenues came from brewing and pubs. Today, pubs are off the menu (bar those supporting the hotel estate), while brewing is long gone.

In their place are 2,218 UK coffee shops, and a 68,000 room hotel estate. Quite the transformation. Costa revenues grew from £143m in 2005 to £1.1bn in 2015, compound annual growth of 23% a year, while Premier Inn clocked up growth of 12%. 2016 growth remained respectable, but it's at a notably slower rate.

There are a number of short run reasons for that, ranging from weakness in the London hotel market to lower city centre footfall hitting Costa's high street shops. New products, including self-service coffee machines and the stripped down 'hub' City Centre hotels, may go some way to alleviate those pressures.

Longer term, there's still room for both brands to grow domestically, with less than 10% market share in key segments such as London hotels. However, that growth is unlikely to be as rapid as it once was. Costa in particular might be bumping up against the edges of the tank in some areas. The UK's appetite for coffee may be insatiable, but the need for places to sell it isn't and Costa's recent growth has been driven by new store openings.

Overseas expansion may be a response. Premier Inn's international business has been rebalanced, focussing future efforts on Germany where initial signs are good. Costa is further down the international road, and already turns a small profit on its overseas operations.

Overall, we still like what Whitbread has to offer. Premier Inn is a great product and Costa has a strong position in an attractive market - having recently been named the UK's favourite coffee shop brand for the 7th year in a row. There is no reason why both couldn't sell as well internationally as they do at home, but building international brands from scratch takes time. For now the challenge is guiding a more mature UK business through less favourable economic conditions.

Prior to the results announcement Whitbread shares were trading on a prospective yield of 2.3% and a PE ratio of 16.5 times (a 5.7% discount to its five year average).

Full year results

Fourth quarter results at Premier Inn & Restaurants were stronger than the year as a whole, driven by stronger like-for-like sales growth at Premier Inn, and the contribution from new restaurants. Across 2016 revenues grew 6.6%, hitting £1.9bn, with like-for-like (LFL) growth of 1.5%. Full year profits were £468m, up 7.4%.

The division opened 3,816 new UK hotel rooms in the year, with the current UK pipeline standing at 14,500 hotel rooms. There are plans to open a further 5 hotels in Germany and two in the Middle East joint venture.

Costa saw total sales growth slow in Q4, with LFL sales falling 0.8%, although this reflects the timing of the quarter end without which sales would have risen 0.6%. Positive performance continues to be driven by travel and 'Drive Thrus', with high street store LFLs down just over 1% in a more cautious consumer environment.

Across the year as a whole, UK profits rose 4.4% to £154.3m, with international profits up to £3.7m. Revenues grew 10.7% to £1.2bn, driven largely by the 255 net new Costa stores and 1,585 Costa Express machines. LFL revenues rose 2%, while margins were down 0.8 percentage points, slightly ahead of previous guidance. Costa is targeting 3,000 UK stores in the medium term, from 2,218 today.

Net debt fell slightly over the year and now rests at £890m (2015: £910m), as organic cash flow and proceeds from the sale & leaseback of hotels more than offset expansionary capital expenditure.

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.