Whitbread’s first half revenue fell by 2% to £1.5bn, with the decline led by UK Food and Beverage sales. The key UK accommodation division was flat, with average room rates up and occupancy down.
The drop in revenue and increased finance charges saw underlying pre-tax profit fall 7% to £0.3bn.
Free cash flow fell from £0.3bn to £0.2bn, largely reflecting an increase in capital expenditure.
Underlying net debt including lease liabilities rose from £2.9bn to £3.3bn, due to the addition of new hotel leases and further share buybacks.
Trading momentum into the second half is positive. However full-year profit guidance in the fledgling German operation has been lowered and UK cost inflation is trending higher than previously expected.
The interim dividend of 36.4p was unchanged.
The shares were down 8% in early trading.
Our view
Investor sentiment had been strengthening ahead of Whitbread’s half-year results. But with full-year guidance erring on the negative side, there was little scope for analysts to upgrade their forecasts. The stock market’s reaction on the day suggests investors had been hoping for some more positivity.
Despite the immediate challenges, Whitbread remains focussed on expanding its UK footprint, which could create further headwinds should the economy take a turn for the worse.
Premier Inn guests provide a captive market for the group’s food and beverage arm, and rapid progress is being made to reduce involvement in lower-returning standalone pubs and dining venues in favour of integrated restaurants at Premier Inn.
Shutting down branded restaurants also frees up real estate for Premier Inn’s expansion, with over a quarter of the 12,000 or so room openings planned by 2030 expected to come from restaurant conversions.
The recent uptick in revenue generated by Premier Inn rooms has been supported by a busy events calendar in London. However, there are some signs of softness in the region, suggesting that the underlying demand picture is a little less resilient.
And when it comes to the Group’s £1.7bn cost base, recent increases in Employer’s National Insurance and the National Living Wage are driving a rise in expenses that will more than wipe out the benefit of cost savings this year. With up to £180mn of efficiencies identified for the following four years, there’s some scope for margins to improve thereafter. But with inflation proving stickier than previously expected, there remains challenges to overcome on that front.
If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. But trading here has recently become more challenging, and it’s yet to turn a profit. So it could be a while before Germany makes a meaningful contribution.
Whitbread’s considerable investment plans of around £0.7bn for the current year should be largely funded by cash flows and disposals of non-core assets. Borrowings have been on the increase. For now, net debt remains within the Group’s target range. But that could change if market conditions deteriorate, raising question marks about the group’s ability to fund its spending commitments and planned payouts to shareholders.
Whitbread is well-placed to continue outperforming its competitors, and we see long-term potential for both organic growth and further consolidation. However, we think the valuation broadly reflects the group’s outlook. With little potential for near-term catalysts, potential investors should therefore adopt a longer-than-usual investment horizon.
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 LSEG Datastream, 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.