Market snapshot: Middle East conflict, rates plus Whitbread Q1 analysis

US markets trod water leading into the Juneteenth holiday which will see US markets closed today, as the Federal Reserve stood pat on interest rates as widely expected.

While the Fed is clearly being influenced by the President’s tariff decisions, it will not be swayed by his protestations to cut rates immediately. Instead, it explicitly stated that it will continue to monitor tariff impacts, especially on inflation, but also on investment and hiring decisions.

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Fed chair Jerome Powell implied that there could yet be two rate cuts to come this year, but did not commit to easing, particularly if the threat of stagflation emerges. The limited market moves did little to alter the year-to-date performance of the main indices, where the Dow Jones is down by 0.9%, while the S&P500 and Nasdaq are above the waterline with gains of 1.7% and 1.2% respectively.

Inaction is also expected later today in the UK, where the Bank of England’s traditionally cautious approach to monetary easing is likely to prevail. A no change interest rate decision has been factored in by markets, where interest is likely to focus on the Bank’s current view on the economy and the immediate outlook, especially given the increasingly harmful effect of the Budget measures and its impact on consumer and business confidence.

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Investor insouciance was coupled with a technical drag on the FTSE100, where a raft of stocks traded ex-dividend, including the likes of United Utilities Group Class A (LSE:UU.), Persimmon (LSE:PSN) and Compass Group (LSE:CPG).

A further spike in the oil price given the current geopolitical tensions takes the price of black gold ahead by 3% so far this year, which unsurprisingly lifted the oil majors in early trade. The drift for the premier index tempered some of its recent gains, although a rise of 7.8% in the year to date continues to underline its credentials as a creditable and alternative investment destination.

Whitbread

There is little for investors to cheer in this update, even though it needs to be taken in the context of Whitbread (LSE:WTB)’s ambitious five-year plan.

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 a third since pre-pandemic although despite these major challenges there are some signs that the group is on the road to recovery.

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.

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. Within the plan, the German operation is expected to be making a significant contribution, with adjusted pre-tax profit of £70 million emanating from what should then be 20000 rooms. In addition, the group is optimising its Food and Beverage offer, which includes converting restaurants as well as integrating the restaurant offer where possible into existing hotels, away from the more traditional standalone sites 

As such, the Food and Beverage unit is suffering either from the exit from some of the existing sites or disruption caused by the new conversions, and sales are running some 16% shy of the corresponding period last year, as expected. Some of this slack has been picked up by other parts of the business, such as the accelerating growth in Germany, as well as a cost reduction programme which aims to deliver £60 million of savings in this year as a whole, and property disposals which should raise between £250 million and £300 million.

This 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 3.5% 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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For this quarter, the numbers are mixed with total group sales down by 4%, with Premier Inn UK accommodation sales dropping by 2% versus the previous year, accompanied by a similar decline in Revenue per available room. Rather more promisingly, the German unit reported a rise of 16% in accommodation sales, albeit from a lower base and, after some years of investment and incremental brand awareness, is expected to move into profitability this year. Even so, at just 9% of group revenues, it could be some time before Germany makes a meaningful contribution to profits, although it could be seen as the largest medium-term growth area for the group.

Whitbread shares have struggled against the backdrop of a tough consumer environment, especially in the UK, and have fallen by 5.5% over the last year, during which time the wider FTSE100 has seen a 7.8% gain. The group is nonetheless generally well regarded for its prospects and, if achieved, the strategic plan would mark a successful step-change. The market consensus of the shares as a buy reflects that the group has some underlying investor support in achieving this aim.