Whitbread plc (WTB) Ordinary 76 122/153p Shares

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Whitbread’s annual revenue fell 1% to £2.9bn driven by declines in the UK. Here the biggest faller was food & beverages which was impacted by restaurant closures and disposals. UK accommodation sales were flat with a decline in occupancy offset by room openings.

Underlying profit before tax fell 14% to £483mn compared to analyst forecasts of £472mn.

Free cash flow fell from £398mn to £295mn, and net debt rose by 7% to £4.7bn when including lease liabilities.

A final dividend of 60.6p meant the total for the year was unchanged at 97.0p per share. Whitbread launched a share buyback of £250mn to complete over twelve months.

UK accommodation sales fell 1% in the first seven weeks of this year. For the year ahead, UK costs inflation is expected to be around 2% and net capital expenditure guidance stands at £400mn-£500mn. Germany is expected to deliver its first underlying pre-tax profit of up to £10mn.

The shares rose 4.6% in early trading.

Our view

Whitbread’s full-year results revealed that demand at Premier Inn UK has remained sluggish into the new year. But the group continues to outperform the competition and a fresh buyback was enough to keep investors happy on the day.

The UK's largest hotel chain continues to enjoy an enviable brand position in the value and mid-range hotel sector. While strength in forward bookings gives some comfort, questions remain as to when domestic growth will return. Another risk to watch is the potential for reduced visits from overseas if key economies start to deteriorate and the pound continues to rally.

Despite the immediate challenges, Whitbread remains focussed on expanding its UK footprint. 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.

The shift in focus towards integrated restaurants within its hotels seems a shrewd move. Over a quarter of the 12,000 or so room openings planned by 2030 are expected to come from restaurant conversions. With demand flagging, Whitbread should pay close attention to the timing of its UK expansion.

Easing inflation at home is not doing the group any favours. It’s putting pressure on room rates. And when it comes to the Group’s own £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. But with £190mn of efficiencies identified for the following three years, there’s scope for margins to improve thereafter.

If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. But it’s yet to turn a profit. So it could be a while before Germany makes a meaningful contribution.

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 investment plans of around £0.7bn for the current year should be largely funded by cash flows and disposals of non-core assets. This also helps feed into the group's ability to return cash to shareholders. But if demand remains sluggish, management may need to revise its spending priorities.

Whitbread is well placed to continue outperforming its competitors and we 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 a weaker demand environment remain very real.

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.

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.

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