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Whitbread - on track for the full year, but UK market still tough

Nicholas Hyett | 16 January 2020 | A A A
Whitbread - on track for the full year, but UK market still tough

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Whitbread plc Ordinary 76 122/153p

Sell: 2,455.00 | Buy: 2,457.00 | Change -28.00 (-1.12%)
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Total sales rose 1% in the third quarter, as food and beverage sales grew 2.2% and accommodation 0.3%. However, that was driven by new openings, particularly in Germany, with UK like-for-like (LFL) revenue down 1.3% in the quarter.

Despite the tougher conditions in the UK Whitbread expects to deliver full year results in line with expectations, but guidance for future trading was cautious.

The shares fell 5.4% in early trading.

View the latest Whitbread share price and how to deal

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 with the sale of Costa Coffee, the focus is now firmly on Premier Inn.

Trading is tough for the discount hotel chain, with fewer visitors despite lower prices. Business and social travel tends to fluctuate with the fortunes of the economy, and with uncertainty looming large in the run up to the election customers have been tightening the purse strings.

Longer-term we believe the product is strong. The pipeline currently stands at 20,000 rooms, the largest it's ever been. The UK accounts for two thirds, 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, although 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 21.1 times future earnings, above the long run average of 16.3 times.

While we're on board with Whitbread's expansion strategy we see challenges ahead in the near term. Given the price tag, which doesn't leave much room for error, that's potentially a concern.

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Third Quarter Results

Total sales in the UK business rose 0.3%, as food and beverage growth of 1.9% offset a 0.4% decline in accommodation sales. However, LFL sales declined 1.3%, driven by lower accommodation sales of 2.1% while food and beverages rose 0.4%.

While the number of UK hotel rooms remained broadly flat, revenue per available room (RevPAR) fell 4.4% in the UK to £50.23. That reflects a decline in both occupancy rates, down 1.8 percentage points to 80.8%, and average room rates falling 2.3% to £62.18.

Premier Inn outperformed the London market but its regional hotels continue to struggle, which management attributed to weaker business and leisure confidence. Despite a more positive start to the fourth quarter the group remains "cautious" on the UK hotel market.

Growth remains on track in Germany. Three hotels are open and trading, with 45 further hotels in the pipeline (including 22 from acquisitions).

Premier Inn's pipeline across both the UK and Germany currently contains 20,000 new rooms. The company expects to deliver 5,000 new rooms this year, opening 3,000 in the UK the rest in Germany. However, ongoing optimisation of the UK portfolio will see 8 hotels disposed of in the UK this year, bringing net new rooms down to 2,500.

Looking ahead to full year 2021. Margins are expected to face a £60m cost headwind, despite cost savings of around £40m. That reflects higher wage and utility costs as well as £25m of investment. German losses will be around £10m, £2m less than this year. Debt interest costs are expected to be £10m higher, following the return of capital to shareholders this year.

Find out more about Whitbread shares including how to invest

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

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