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Whitbread - strong Q3 growth in UK and Germany

Whitbread's third quarter sales were up 12%.

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Whitbread's third quarter sales were up 12%. UK Accommodation grew faster than food & beverage, with higher room rates more than offsetting a small fall in occupancy.

Sales in Germany were up 47% led by continued growth in the estate.

In the first five weeks of the final quarter accommodation sales were up 12% in the UK and 61% in Germany. There were no changes to full year guidance.

Whitbread has now completed £226mn of its £300mn share buyback programme.

The shares were up 1.6% following the announcement.

View the latest Whitbread share price and how to deal

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's helped drive average revenues generated by each room nearly 40% above pre-pandemic levels.

We're particularly supportive of the increased focus on attracting business customers, who now make up about half of Premier Inn's accommodation revenues. This provides extra diversity in the customer base - meaning the group isn't reliant on one type of customer.

Some signs are emerging that room rates may be under a little pressure, particularly in regional hotels. Looking ahead, Whitbread may need to pedal harder to sustain growth in the UK, particularly as economic headwinds mount. The group's management of the inflationary backdrop has been impressive, and the rate of growth in the cost base looks set to moderate. This should give some flexibility to adjust prices in the face of a downturn without doing too much damage to the bottom line.

Looking ahead, Whitbread still sees more to go for in the mature UK and Ireland market, and sees a potential ceiling of 125,000 rooms vs current footprint of about 91,000. It's not the only chain with expansion plans. 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. Meanwhile ongoing distress amongst independent hoteliers could allow Whitbread to acquire sites at advantageous rates.

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 good health. 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 £0.5bn for the current year should be fully funded by cash flows. 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. 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 Refinitiv. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 11th January 2024