Investors check out of Whitbread shares after these results

Whitbread (LSE:WTB)’s five-year plan continues to gather momentum, with its German operation likely to contribute a profit for the first time over the course of this year.

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This would be an important milestone in a market which Whitbread believes to be an area ripe for the picking and a source of medium-term growth. In this six-month period, accommodation sales rose by 9% (and are maintaining this level in current trading), leading to an adjusted pre-tax loss of £3 million in the 26 weeks to 28 August, an improvement from the £9 million deficit in the corresponding period. More importantly, Germany is now expected to contribute £5 million of adjusted pre-tax profit for the year, with a softer second quarter leading to a marginal downgrade on the previously estimated £5 million to £10 million. Further out, the aims are clear – by 2030, Whitbread expects adjusted pre-tax profit of £70 million emanating from what should then be 20,000 rooms.

In the meantime, Premier Inn UK continues to do much of the heavy lifting and is by far the group’s most important business at present. While accommodation sales were flat versus last year and revenue per room dipped by 1%, on current trading both are showing growth of 3% given a more recent busy events schedule in London. Forward bookings are ahead of last year, and the group is introducing measures to fine tune profitability. It is, for example, looking at ancillary revenues where guests are able to pay extra for the likes of early check-in and late check-out, “Rooms with a view” and parking.

Despite these relatively lacklustre numbers for Premier Inn UK, the irony of the ravages wrought by the pandemic is that it provided Whitbread with some major opportunities given a structural shift in the sector. Many independent hotels went to the wall as a result and there was next to no new hotel construction activity, which opened up the market to the larger operators. This contributed to Premier Inn becoming the largest hotel chain in the UK, with a 12% share of total hotel room supply. In relative terms, Premier Inn has consistently outperformed the market since the end of the pandemic and continues to do so.

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At a group level, the signals are mixed, although there is a great deal of activity under the bonnet. Revenue for the period dropped by 2% to £1.541 billion, while adjusted pre-tax profit was 7% lower at £316 million, although both were marginally ahead of estimates. Cost savings to the tune of £43 million means that the group is upping its target for this year to a range of £65 million to £70 million from a previously guided £60 million.

A revised property valuation of between £5.5 billion and £6.4 billion will provide the group with additional flexibility in achieving its costly aims. Net debt is currently at £563 million from a previous £370 million, part of the reason being the costs of a revamp within the Food and Beverage unit. Progress is being made, but for this period the unit is suffering either from an exit from some of the existing sites or disruption caused by the new conversions, with sales running some 11% shy of the corresponding period last year. Even so, the moves will unlock 3,500 high margin extension rooms, 500 to 700 of which should take place this year.

Overall, the strategic plan targets adjusted pre-tax profit of at least £300 million and some £2 billion available for shareholder distributions by 2030. It also aims to increase its hotel room estate to 98,000 by that time, en route to its long-term target of 125,000. The group recognises the challenges ahead, such as currently lukewarm consumer confidence and an uncertain economic outlook which have contributed to a soft trading backdrop, while ongoing reinvestment into the business has also left its mark.

The financial juggling act should allow for continuing shareholder returns, with the balance sheet in reasonable shape. Whitbread is in the midst of an ongoing £250 million share buyback programme, while a current dividend yield of 3% is average rather than punchy compared to its premier index peers. The impact of the Budget measures is another headwind, previously estimated to equate to cost inflation of between 5% and 6% this year, although this should be reduced to between 2% and 3% given the mitigating effects of the cost savings.

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It has been and could continue to be a tough environment for Whitbread. The sale of its jewel in the crown, Costa Coffee to Coca-Cola in 2019 for £3.9 billion somewhat left Whitbread flying on one engine, largely reliant on its Premier Inn business. The situation was then compounded by the onset of the pandemic, and more recently the rise in interest rates and inflation, and therefore consumer confidence. Indeed, the shares remain down by 21% since pre-pandemic and by 24% from the previous peak achieved in March 2019.

Of late, the shares are on an improved trajectory, with a 28% spike over the last six months contributing to the shares having risen by 5% over the last year, as compared to a gain of 13% for the wider FTSE100.

The lower profit numbers, although expected, as well as the marginal downgrade to the German business have unfortunately taken centre-stage at the market open Thursday, with the shares dropping sharply. Further out, however, this long-established and well-regarded company continues to attract the support of investors, with the market consensus of the shares as a buy reflective of optimism for the long haul.