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

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In an unplanned trading update, Whitbread has confirmed that previously downgraded guidance remains unchanged. UK cost inflation is expected to reach 2-3%, and a maiden pre-tax profit in Germany of up to £5mn is expected.

Next year cost inflation is expected to increase to 7-8%, including an estimated £40-50mn impact from changes to business rates announced in the UK Autumn Budget. The group will look to deliver £60mn of cost savings to help limit the impact.

The shares were down 9.8% in afternoon trading.

Our view

The Autumn Budget has brought an unprecedented rise in local business taxes payable by larger hotels. With cost pressures already taking their toll, the estimated additional hit of £40-50mn to Whitbread’s profits next year prompted a steep fall in the shares.

The changes are complex, but the impact is likely to be significantly higher in subsequent years. If similar measures are introduced in Scotland and Wales, there could be more pain to come.

Whitbread has plans to further expand its Premier Inn footprint in the UK, but this latest financial burden is a shift of the goal posts. With larger hotels the worst affected some changes to the room opening road map are to be expected.

The higher charges on larger hotels also favour independent hoteliers and smaller groups, so there’s a risk of Whitbread’s competitive edge becoming blunted. Premier Inn remains a powerful brand, with an impressive track record of market outperformance. Still, it’s hotels and restaurants will need to be running pretty fast just to stand still.

Whitbread has other strategic levers that it’s pulling on both at home and in the newer German division. That’s 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.

Back on home soil, post-pandemic room rate increases were a key tool for beating inflation, but demand has been more fragile over the last couple of years. Given the outlook for costs, profits will be particularly sensitive to any deterioration in the demand backdrop. On the bright side recent trading has been encouraging.

Cost efficiency is another key strategic pillar, with £250mn of annualised cost savings targeted by 2030, and an upgraded target of £60mn for next year. Even after these savings Whitbread’s expecting UK cost inflation of around 4% in the next financial year, somewhat faster than the 2.5% forecast for the wider economy.

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.

Previous Whitbread plc updates