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Whitbread - Returning the Costa proceeds

Nicholas Hyett | 17 January 2019 | A A A
Whitbread - Returning the Costa proceeds

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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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Investment in UK & international growth means Whitbread's underlying profit before tax is expected to be flat next year. Analysts had been hoping for an increase. The shares moved 1.5% lower on the news.

After completing the £3.9bn sale of Costa earlier than expected, the group has also announced an initial £500m share buyback. We'll need to wait until the Capital Markets Day on 13 February to hear plans for the remainder of the cash.

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Our view

After starting out in brewing and pubs all the way back in 1742, Whitbread has reinvented itself more times than David Bowie.

The last 25 years have seen it go around the leisure carousel a few times with ventures into casual dining, cafes and fitness, but after selling Costa to Coca Cola, the focus is now solely on hotel chain Premier Inn.

The sale is a bittersweet moment for Whitbread investors.

Costa, which was bought for just £19m in 1995, had long been the jewel in Whitbread's crown. Having successfully cracked the UK market, the brand had exciting international growth potential too, especially in China.

However, some investors argued that there was little point in holding a hotel and coffee chain under the same roof, and the £3.9bn proceeds are significant. We think the price is likely far higher than Costa could have achieved as an independently listed company, and represents a premium to the value it added to Whitbread.

So, what next?

Premier Inn is a mature business, looking to expand in developed markets and capitalise on the growth of branded, value hotels.

Most of its 1,200 or so hotels are owned rather than leased. That means a lot of money is tied up in the business, but a sizeable property portfolio means the company can shoulder significant quantities of debt, should management choose to take that approach.

Performance has been disappointing recently. However, a large portion of that could well be down to wider uncertainty. Business and social travel tends to fluctuate with the fortunes of the economy, and with uncertainty looming large, customers are tightening the purse strings.

Longer-term we believe the product is strong, but growth is likely to be steady rather than spectacular, and the dividend will be a major component of overall return.

The prospective yield is just 2.2% now, but that could be augmented with specials as the Costa proceeds are dispersed. Even after making contributions to reduce debt and the pension deficit, Whitbread will still have a significant sum burning a hole it its pocket.

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Third quarter trading details

UK sales are up 2.5% in the third quarter, driven by the addition of over 2,000 new Premier Inn rooms. However, like-for-like (LFL) sales are down 0.6%, with food & beverage down 1.5% and accommodation down 0.2%.

While the London market was strong in the quarter, that was offset by weakness outside the capital. Overall, occupancy fell 0.7 percentage points to 82.5% and average nightly rates fell 0.5 percentage points to £63.66. Revenue per available room fell 1.4% to £52.55.

Looking ahead, the group remains cautious on UK environment next year given uncertainty and higher inflation.

Premier Inn's hotel in Frankfurt continues to perform well, with sales up 14.2% year-to-date and occupancy now approaching 70%. The German pipeline now stands at over 6,000 rooms across 34 hotels, including 19 due to be acquired from Foremost Hospitality Group.

Looking ahead to 2020, the group expects to add 3,000-4,000 UK rooms, and 2,500 in Germany. Cost increases of £70m, should be partially offset by £40m-£50m of cost savings.

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The non-executive chair of Hargreaves Lansdown is also a non-executive at Whitbread.

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.