Whitbread’s full year revenue grew by 13% to £3.0bn. Premier Inn UK grew sales by 10%. The less mature Premier Inn Germany’s revenue grew by 62%.
Underlying operating profit rose 24% to £674mn, reflecting improved average room yields and prudent cost management.
Free cash flow increased by £80mn to £398mn. Net debt including lease liabilities was up from £3.8bn to £4.4bn after the impact of share buy backs.
In the first 7 weeks of this financial year, UK accommodation sales are 1% lower, impacted by the timing of public holidays. Demand is expected to improve. Food and beverage sales are 2% lower so far. Germany remains on track to reach the break-even point later in the financial year.
Whitbread has also unveiled details of growth and restructuring plans for the UK division.
The final dividend was increased 26% to 62.9p per share and a further £150mn buy back has been announced.
The shares were flat in early trading.
Our view
Whitbread's Premier Inn is now the UK's largest hotel chain and continues to enjoy an enviable brand position in the value and mid-range hotel sector. That helped improve the profitability of its rooms and drive record levels of profits and cashflows last year.
Signs are emerging that indicate increased pressure on the UK hospitality sector, particularly impacting standalone pubs and restaurants. Whitbread’s plans to reduce its involvement in this segment, shifting focus towards integrated restaurants within its hotels would seem a shrewd move. Over a quarter of the 12,000 or so room openings planned over the next 4 years are expected to come from restaurant conversions. Too much additional supply could hurt profits if demand doesn't keep pace. But given the supply that's come out of the market since the pandemic, we're not too concerned. The plan should generate an annual increase in underlying pre-tax profits of £80mn-£90mn, although in the short term it’s expected to be a drag on profits. On the costs front, expectations for3-4% inflation on the UK cost-base remain in place for the current financial year. A further £150mn of cost savings have also been identified to be delivered over the next three years. This should give some flexibility to adjust prices in the face of a downturn.
If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. It has a much smaller footprint here and is yet to turn a profit. About 60% of rooms in Germany are run by private hotels - we think there's opportunity for an experienced hotelier like Premier Inn to establish a foothold. But it could be a while before Germany makes meaningful profits.
The balance sheet is also in reasonable shape. That's helped by the fact the group owns over half its hotels, rather than leasing them. What's more, its considerable re-investment plans of around £0.6bn for the current year should be fully funded by cash flows and disposals of non-core assets. This also helps feed into the group's ability to pay a dividend and supports ongoing share buybacks. As ever no pay-outs to shareholders are guaranteed.
We're impressed with Whitbread's continued progress and see long-term potential for both organic growth and further consolidation. The valuation sits below the long-term average and in our view, isn't overly demanding. However, the near-term challenges of an economic slowdown remain very real. Investors should be prepared for some ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
Whitbread's management of material ESG issues is strong according to Sustainalytics.
Human capital management is considered above average with a strong development program in place. The company has appointed a management committee for overseeing ESG issues, but reporting is not in accordance with leading standards. As the owner of the UK's largest hotel chain, we would like to see an improvement in carbon intensity, and clearer targets on reducing its water usage. Further, management of product governance has been called out as average with no evidence that Whitbread's hotels and restaurants have received external quality certifications.
Whitbread key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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