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

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Whitbread’s third quarter sales rose 2% to £781mn. UK accommodation sales grew by 2.3% driven by strong pricing which more than offset a small dip in occupancy. Restructuring of the group’s branded restaurants contributed to a fall in food and beverage sales. Sales at Premier Inn Germany were up 17%.

Cost saving guidance for this year has improved by about £10mn to £75-£80mn. The cost hit from changes to the business rates regime next year is now expected to be £10mn lower than first thought.

The £250mn buyback program is close to completion.

The shares were up 4.4% in early trading.

Our view

Whitbread’s robust third quarter sales update came with some much-needed good news on the cost front, helping shares reach their highest level since the November budget. However, investors shouldn’t pay too much attention to the lowered estimate for next year’s business rates bill.

The more important question is how much higher it will go in future years, and for now that remains unanswered. Pressure is building on the government to provide extra support to the hospitality industry, but there’s no guarantee of any relief for hotels.

Premier Inn remains a powerful brand, with an impressive track record of market outperformance. With the group’s UK cost inflation running at around 7% before mitigations, it’s hotels and restaurants will need to be running pretty fast just to stand still.

Post-pandemic room rate increases were a key tool for beating inflation, but demand has been more fragile over the last couple of years. There are some signs of an improvement, but given the outlook for costs, profits will be particularly sensitive to any deterioration in the demand backdrop.

That puts greater pressure on the board to drive efficiencies, with £250mn of annualised cost savings targeted by 2030, over half of which is expected to be delivered by the end of the next financial year. Even after these savings, Whitbread’s expecting UK cost inflation of around 3.5% in the next financial year, somewhat faster than the 2.5% forecast for the wider economy.

The newer German division is making good progress in an exciting market but being just on the cusp of profitability it’s unlikely to make a huge difference to the bottom line any time soon.

For now, net debt remains within the Group’s target range. But the increasing stress on the cost base has the potential to damage cash generation. That could threaten the company’s ability meet ambitious commitments to invest in its estate and pay cash back to shareholders.

We think Whitbread is a shrewd operator where the current weakness in the valuation would normally be seen as an attractive entry point. However, the risks to forecasts look to be more elevated than usual. We’d like to hear how this latest layer of extra costs impacts the company’s five-year plan before making further conclusions about the group’s prospects.

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 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.

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