ii view: Premier Inn owner Whitbread reports lower profits

Funds from the Costa Coffee sale have been returned. But investors now battle reduced diversity.

First-half results

• Revenue flat at £1.08 billion 
• Pre-tax profit down 7.1% to £220 million
• Revenue per available room (RevPAR) down 5.2%
• Interim dividend unchanged at 32.7p

Chief executive Alison Brittain said:

“We have delivered a resilient first half profit performance despite challenging market conditions in the UK. Shorter-term trading conditions in the UK regional market have been difficult, particularly in the business segment where we have a higher proportion of our revenue, whilst trading in London remained strong. Against this challenging backdrop, we have a number of activities underway which continue to build our brand strength as the UK's favourite hotel chain.

Whilst the near-term market conditions in the UK remain uncertain, we have confidence in the long-term structural opportunities available in the domestic budget travel markets in the UK and Germany. Following successful completion of our return of surplus capital programme, we still have a strong balance sheet, providing support for ongoing disciplined deployment of capital, which will deliver growth over the longer term."

ii round-up:

Following the sale of its Costa Coffee business to Coca-Cola, Whitbread (LSE:WTB) today owns and operates budget hotel chain, Premier Inn. Largely within the hotels, it also owns restaurant brands including Beefeater, Brewers Fayre and Table Table.

Employing over 35,000 people, it operates just over 800 hotels comprising nearly 77,000 rooms in the UK and 3 hotels and just under 600 rooms in Germany. Including German hotels recently acquired, the pipeline of rooms runs to nearly 8,000. It also operates 8 hotels through a joint-venture with Emirates in the Middle East. 

For a round-up of these first-half results, please click here.

ii view:

The sale of its Costa Coffee business to Coca-Cola for £3.9 billion has enabled Whitbread to return significant value of funds to shareholders via both a share buy-back and a tender offer.  However, the price for extracting this value is arguably reduced business diversity, with the company now a major play on the cyclical hotel market. 

For investors, expansion into Germany does increase its international diversity. London hotel exposure and a Brexit-hit pound provide some counterbalance to current regional weakness and low Brexit induced business confidence. However, a one-year prospective dividend yield of just over 2% (not guaranteed), although covered twice by earnings, sits below the 4% plus average yield on the FTSE-100 index. A forward price earnings (PE) ratio above both the 3- and 10-year averages also offers little current incentive. 

Positives: 

• Looking to build the number one budget brand in Germany
• Cost saving programme being pursued
• Management points to a strong balance sheet

Negatives:

• Costa Coffee disposal reduces business diversity
• High exposure to weaker regional and business travel markets
• Early German losses due to cost of expanding hotel network

The average rating of stock market analysts:

Sell