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Whitbread - Costa back in the black

Nicholas Hyett | 21 June 2017 | A A A
Whitbread - Costa back in the black

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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 saw like-for-like sales growth of 2.9% in the first quarter, with total sales up 7.6%, boosted by net new openings in both Costa and Premier Inn.

The shares rose 5.4% following the announcement.

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 2,270 UK coffee shops, and a 69,000 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 checked in growth of 12%. Recent performance is still respectable, but notably slower.

There are a number of short-term 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.

However, Whitbread is a more mature business now, and that has inevitable consequences for growth. There's still room for both brands to grow domestically, with less than 10% market share in key segments such as London hotels, but UK 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 thirst for coffee may be insatiable, but demand for coffee shops isn't, and Costa's recent growth has been driven by new store openings.

Overseas expansion seems a reasonable 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, with positive noises coming out of China too.

We see no reason why both couldn't sell as well internationally as they do at home, but building international brands from scratch takes time. In the immediate future the challenge will be 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 2.6% and a price to earnings ratio of 14.7 times (a 16% discount to its five year average).

First Quarter Update

Premier Inn continued to win market share, with sales growth of 9.2%. In the UK, total occupancy was up on the first quarter of last year, at 79.2%, despite increasing capacity. However, Revenue Per Available Room (RevPAR) growth of 3.1% was behind the wider market, with 2.8% growth in London RevPAR well behind the market's 6.8%.

Sales at Costa grew 8.7%, as UK like-for-like sales growth of 1.1% was boosted by strong travel and 'drive thru' growth. Costa has been rolling out its expanded cold drinks range in the last month with a new breakfast range also introduced towards the end of the quarter. Costa Express installed a further 300 machines in the quarter.

The group's first Premier Inn in Germany continues to perform well, and the Costa business is seeing good progress in China. Management are targeting expansion in both markets.

Whitbread remains on track to open around 4,200 hotel rooms, 230-250 Costa coffee shops and install 1,250 Costa Express machines this year. The group expects proceeds of around £100-150m from sale and leaseback transactions this year, of which £51m have so far been achieved.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.