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Whitbread - tough trends

George Salmon | 30 April 2019 | A A A
Whitbread - tough trends

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Whitbread plc Ordinary 76 122/153p

Sell: 3,371.00 | Buy: 3,373.00 | Change 35.00 (1.05%)
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Whitbread has announced a slight increase in underlying full year revenue and profits. However growth weakened through 2018, as political uncertainty grew, and the group expects a challenging year ahead.

The shares fell 2.7%.

The full year dividend was trimmed slightly to 99.65p, reflecting the £3.9bn sale of the Costa business, which completed in January 2019. The group plans to return another £2bn to shareholders through buybacks, in addition to the current £500m buyback plan.

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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, and after selling Costa to Coca Cola, the focus is changing again.

The success of Costa meant some will have been sad to see it go, but the £3.9bn proceeds are significant and some investors argued that there was little point in holding a hotel and coffee chain under the same roof.

The focus is now entirely on Premier Inn. It's a mature business, looking to expand in developed markets and capitalise on the growth of branded, value hotels.

Most of its 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.

By deciding to load up with around 3.5 times adjusted operating cash flows, it's an option management are considering. This should enable the group to leverage returns, but all debts carry risks.

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. The UK pipeline is not insignificant, but progress is likely to be steady rather than spectacular as it's already a mature market. The German expansion brings some growth potential, but there are still only 2 hotels open for business at present.

The current prospective yield is 2%, but in the near term the £2.5bn share buyback makes up the bulk of shareholder return. To put that in context, that represents around 30% of the current shares outstanding.

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Full year results

Underlying revenue rose 2.1% to £2bn, as a 5.1% increase in the number of rooms was offset by lower occupancy, which dragged revenue per available room down 1.7% to £48.99 a night. Food and beverage sales also fell, down 2% on a like-for-like basis.

Cost inflation ensured costs increased slightly ahead of revenue growth, despite the ongoing efficiency programme. As a result, underlying pre-tax profit rose 1.2% to £438m.

Revenue growth was weighted to the London market, although the 7.2% increase in accommodation sales was driven by new capacity. Revenue per available room was down 0.9%, however Whitbread says this was due to the short-term impact of opening new hotels

Outside of London, Premier Inn sales growth decelerated from 4.3% in the first half to just 0.5% in the second. That drop is wider than the 3.5% to 0.9% drop seen in the wider market. Whitbread said its regional business is particularly impacted by heightened uncertainty around the UK economy.

New openings mean the group now has 804 hotels in the UK, up from 785 last year. The group opened its second German Premier Inn in Hamburg in February 2019.

The freehold value of the Premier Inn network is now in the region of £4.9bn- £5.8bn.

Whitbread has its largest ever committed pipeline of nearly 20,000 rooms, including 7,000 in Germany.

Following the Costa sale, the group has a net cash position of £380m, including lease obligations. Longer-term it will aim to operate with net debts of around 3.5 times operating cash flows.

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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.