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Whitbread - Good revenue growth, but cost pressures drag

George Salmon | 24 October 2017 | A A A
Whitbread - Good revenue growth, but cost pressures drag

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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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Underlying operating profits rose 7.1% in the first half, hitting £342m, driven by a strong performance from Premier Inn. Profits at Costa remained unchanged compared to a year earlier. The shares fell 2.5% in early trading on 24 October.

The interim dividend increases 5% to 31.4p.

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 more than 2,300 UK coffee shops, and a 70,000 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%. However, while more recent performances remains respectable, there's been a notable slowdown in growth.

There are several 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.

But Whitbread is also a more mature business now, and that has inevitable consequences. There's still room for both brands to grow domestically, with less than 10% market share in key segments such as London hotels, but growth is unlikely to be as rapid as it once was.

Like-for-like RevPAR was up 1.8% at Premier Inn overall, but 3.3% in catchments with no Premier Inn capacity growth. Cannibalisation is clearly a problem. Major cost headwinds in the UK business are adding to the pain, and even the group's impressive cost control has failed to keep margins heading in the right direction.

Overseas expansion seems a reasonable response. Premier Inn's international expansion has focussed on Germany, although it's still early days. Costa is further down the international road, and already turns a small profit on its overseas operations, with especially positive noises coming out of China.

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

Whitbread shares were trading on a prospective yield of 2.5% and a price to earnings ratio of 14.6 times (a slight discount to its ten year average).

Half year results

Premier Inn generated revenues of £1.1bn, up 6.4%, and underlying operating profit of £295m, up 8.9%.

Whitbread has opened more than 2,000 new rooms in the UK so far this year, with the roll-out in Germany gathering pace (1 hotel open and 9 under construction). Estate growth has been supported by a 1.8% increase in like-for-like (LFL) revenue per available room (RevPAR), reflecting an increase in the average rate charged per room, partially offset by a small decrease in occupancy.

Profits of £65m remained unchanged at Costa despite revenues of £622m rising 9.1%. Sales growth reflects the addition of 108 net new stores and ongoing growth in Costa Express machines, with LFL growth in owned stores of 0.6%.

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The UK saw profits fall 4.6%, although at £61m it continues to account for the bulk of profits, as increased labour costs, business rates and a foreign exchange impact all weighed on margins. This decline was offset by a 300% increase in international profits following the acquisition of the outstanding stake in the Chinese joint venture.

Both Premier Inn and Costa increased market share during the half.

Net debt in the period fell 4% to £852m, representing around 1 times EBITDA (earnings before interest, tax, depreciation and amortisation).

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 disclosure for more information.

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.