Interactive Investor

Bullish talk from Whitbread triggers share price bounce

15th June 2022 08:30

Richard Hunter from interactive investor

The hotel operator's first quarter went better than expected and its model remains robust. Our head of markets shares his take on the latest numbers.

Premier Inn hotel and restaurant owner Whitbread (LSE:WTB) has turned a corner following the return to normality, with growth in its first quarter now exceeding pre-pandemic levels for the most part.

Indeed, accommodation sales in the UK are significantly higher than last year but, perhaps more tellingly, are 31% ahead of 2020. The company’s operational and commercial activities have contributed to this strength, and a previous round of fundraising and a new revolving credit facility have underpinned the group’s capital strength. This enabled the reintroduction of a dividend payment earlier in the year, although the current yield of 1.4% is somewhat pedestrian.

Whitbread’s hotel estate is for the most part freehold, which gives the company additional flexibility. This is of particular relevance at present, since the pandemic has left some smaller companies in dire straits or even facing the prospect of going to the wall.

The group is also benefiting from high levels of occupancy, which are averaging around 83%, as compared to the 55% level which the company previously identified as being the breakeven point and the trend remains encouraging.

In addition, the average room rate and revenue per available room are also strongly ahead of both previous numbers as well as expectations, and with 40% occupancy already guaranteed in the second quarter, there is increasing visibility on earnings which has prompted Whitbread to offer an optimistic outlook for the half-year.

At the same time, growth in Germany is continuing apace and, including those hotels in the pipeline, the current estate is going to be doubled. In the meantime, the group is confident that the German experience lends itself to the service which it is providing and alongside a stronger than expected recovery following the lifting of restrictions, the outlook is set fair.

Of course, all is not plain sailing and there is still work to do. The food and beverage outlets remain behind 2020 levels by 4.3%, although again the trend is improving rapidly.

Meanwhile, Whitbread is at the mercy of rising inflationary and supply chain pressures as with so many other companies. The hospitality industry is also particularly affected by a tight labour supply while, longer term, the jury remains out on the return of office-based visitors as business travel struggles to return to previous levels following the success and ease of virtual meetings which became evident throughout the pandemic.

Nonetheless, the company has set aside a figure of between £20 million and £30 million to encapsulate the need for pay increases, while also allowing further refurbishment work and some technology spend.

In all, the encouraging signs are plain to see, and Whitbread is determined not only to maintain pre-pandemic growth but to drive the company to the next level.

Investors have not necessarily agreed so far, with the share price having fallen by 21% over the last year, as compared to a gain of just 0.2% for the wider FTSE100.

The strong share price reaction to the update suggests that, even allowing for the increasing pressure on the consumer, the model remains robust, with the market consensus of the shares as a "strong buy" echoing this optimism on prospects.

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