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Whitbread - profits dip in tougher trading conditions

Nadeem Umar | 22 October 2019 | A A A
Whitbread - profits dip in tougher trading conditions

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Whitbread plc Ordinary 76 122/153p

Sell: 4,214.00 | Buy: 4,216.00 | Change -44.00 (-1.03%)
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Revenues for the first half of the year were flat at £ 1,078m, supported by increases in capacity. Profit before tax fell 4.1% to £ 236m, reflecting a tough leisure environment of lower occupancy and pricing levels.

Whitbread completed its £ 2.5bn capital return programme to shareholders following the sale of Costa.

A half year dividend of 32.7p was declared, unchanged from last year.

The shares fell 1.7% in early trading.

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Our view

After starting out in brewing and pubs 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 the sale of Costa Coffee to Coca Cola means the focus is firmly on Premier Inn.

There were good reasons for selling. The £3.9bn proceeds, most of which were returned to shareholders through a share buyback, are significant. Some investors argued that there was little point in holding a hotel and coffee chain under the same roof anyway.

However, the absence of Costa makes Premier Inn's performance all-important. And unfortunately trading is tough for the discount hotel chain at the moment, with fewer visitors despite lower prices.

A large portion of that seems to 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 pipeline currently stands at over 20,000 rooms, the largest it's ever been. The UK counts for two thirds of it, but progress is likely to be steady rather than explosive. The German expansion brings extra growth potential, but with only 3 hotels open for business it's not enough to significantly move the dial just yet.

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.

In the near term it looks like the group will carry debts of around 2.5 times adjusted operating cash flows. This should enable the group to leverage returns, but all debts carry risks.

Despite being more closely tied to the health of the economy than some other businesses, the market's certainly confident in Whitbread's future. The shares currently trade at 17.9 times future earnings, above the long run average of 16.2 times. While we're on board with Whitbread's expansion strategy it's still early days. The current climate adds to the challenge, and the price tag doesn't leave much room for error.

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Half Year Results

In the UK Premier Inn added 6 new hotels over the half, bringing the total to 810. It added 216 rooms, bringing the total to 76,387. Compared to the same period last year, revenue per available room fell 5.2% to £ 50.19 reflecting a fall in occupancy rates from 80.1% to 78.3%, and a 3.2% drop in the average room rate to £ 64.07.

The group generated £ 197m of free cash flow over the half and net debt now stands at £ 78m.

UK like-for-like sales growth fell in both accommodation and food and beverages, declining 3.6% and 1.2% respectively.

In Germany revenue rose to £ 4m, up from £ 2m over the same period last year. There are now 3 hotels open in Germany and two have occupancy levels of around 70%.

Premier Inn is continuing to expand, with 12,928 new rooms in the UK, and 7,280 new rooms in Germany planned. The company expects to deliver 5,000 of these new rooms this year, opening 3,000 in the UK the rest in Germany.

Whitbread spent £ 119m on expansion during the half. Full year expansionary spending is expected to reach £ 150-200m in the UK and £ 300-350m in Germany.

Management expects lower margins to put a £ 45m dent in full year profits, as cost savings of around £ 45m are offset by losses in Germany and expenses associated with the break up from Costa.

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Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Whitbread.

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