ii view: An uncertain outlook for Whitbread

Profits are expected to meet forecasts this year, but cost headwinds cause concerns.

Third-quarter trading to 28 November 2019

• Total sales up 1%
• Total UK sales up 0.3%
• UK Revenue per available room (RevPAR) down 4.4% 
• Expects current year results to be in-line with forecasts

Chief executive Alison Brittain said:

"Whitbread delivered a robust performance in the third quarter, growing total sales by 1%, despite challenging market conditions in the UK. 

“The UK business achieved total sales growth of 0.3% in the third quarter. Our performance in the quarter reflects a good food & beverage performance and marginally declining total accommodation sales. Weak business and leisure confidence in the regions continued, which was partially offset by the strength of the central London market, where we outperformed.

“Despite the short-term economic uncertainty, there remains significant long-term opportunities for Premier Inn in both the UK and Germany.”

ii round-up:

Premier Inn owner, Whitbread (LSE:WTB), reported third-quarter sales largely in line with analyst forecasts, but added to prior caution for the year ahead. 

Total group sales including new hotels grew by 1%, with the budget hotel operator, which previously owned Costa Coffee, now providing over 80,000 rooms both domestically and overseas. 

UK accommodation sales fell by 0.4%, impacted by ongoing weak regional demand, while food & beverage sales improved by 1.9%. Whitbread also owns restaurant chains including Beefeater, Brewers Fayre and Table Table.

Aided by its cost cutting programme, Whitbread remains on track to meet current full year pre-tax profit forecasts. However, the group which has been expanding its German hotel network, raised concerns regarding the following year.  

A combination of higher national living wage and utility costs, along with required group investment, totalling approximately £60 million are now forecast, up from around £50 million previously. Debt interest costs are also expected to rise following the return of capital post the Costa Coffee sale. 

The share price fell by more than 5% in early afternoon market trading. 

ii view:

The sale of its Costa Coffee business has enabled Whitbread to return significant value to shareholders. However, the price for extracting this value has arguably reduced business diversity, with the company now a major play on the cyclical hotel market. 

Good or bad, the hotelier’s business model now has a relatively high degree of operating leverage. For every 1% movement in Revenue per available room (RevPAR), there is a corresponding gain or loss of £12 to £15 million to pre-tax profit.

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 around 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 three- and 10-year averages also offer little incentive. 

Positives: 

• Cost saving programme
• Looking to build the number one budget brand in Germany

Negatives:

• 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:

Weak hold