Results optimism nudges Whitbread shares to 7-month high

Whitbread (LSE:WTB) remains a work in progress and is in the middle of a “critical” year for its Accelerated Growth Plan, which marks 2031 as the end point.

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As such, these half-year numbers are somewhat messy as ongoing adjustments are made. Revenue for the 26 weeks to 27 August rose by 2% to £1.57 billion, but adjusted pre-tax profit fell by 9% to £287 million, albeit ahead of the market estimate of £276 million. The drop was largely driven by transformation costs, continued expansion in Germany and cost inflation, although the group has a strategy in place to mitigate these headwinds.

The most notable offset is the intention to reduce investment spend while releasing some capital from its property portfolio estate. Whitbread expects property proceeds for the full year to be between £450 million and £500 million, en route to a target of £1.5 billion by the end of the five year transformation plan, which will largely pay for the required growth funding. At the same time, the 2031 aim is for £2 billion of free cash flow, which may be available to shareholders depending on market conditions, and an improvement of 5% on the Return on Capital Employed (ROCE).

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In the meantime, the Accelerated Growth Plan continues apace in transforming the group into a pure-play hotel business. All remaining standalone restaurants within the portfolio are now closed, with others being subsumed into the hotels in which they sit. All affected sites have either been sold or have received offers, while the group is also optimising the use of AI to bolster its discovery of and offering to potential customers.

For the moment, the Premier Inn UK business continues to do the vast majority of the heavy lifting for the group. Whitbread more recently introduced measures to fine tune profitability, such as looking at ancillary revenues whereby guests are able to pay extra for the likes of early check-in and late check-out, “Rooms with a view” and parking.

Indeed, Premier Inn has become 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. Accommodation sales rose by 3% in the period and in terms of current trading, growth of 4.5% has improved the momentum.

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Premier Inn Germany is also making all the right noises. The business contributed a profit for the first time last year, although growth has been slower than hoped. Even so, Whitbread believes Germany to be an area ripe for the picking and a source of medium-term growth. 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 this period accommodation sales rose by 18%, driven by organic growth and increased capacity and in terms of current trading growth of 31.2% is another promising signpost.

With the forward booking position looking positive, the group is maintaining its guidance for the full year. £39 million of cost savings contributed to the annual £60 million target, while ROCE improved to 10.9% from the 10.3% previously reported. Net debt has spiked to £667 million from £563 million, but payment proceeds to come will improve that position. The share buyback programme has now been completed, alongside which the stock continues to pay an attractive 3.9% dividend yield.

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Of course, the world will not stand still in the meantime and competition remains intense in the hospitality industry, while shaky consumer sentiment could lessen the propensity to travel around the country. While the strategy seems sound, execution risk and a five-year timeframe until the benefits wash through are major hurdles which Whitbread will need to overcome.

More recently, there has been some investor insouciance, with the shares having fallen by 23% over the last year, as compared to a gain of 13% for the wider FTSE100, while the most recent pre-pandemic high of March 2019 is some 42% away. It appears that this long-established and well-regarded company continues to attract the support of some investors, with the market consensus remaining at a strong hold alongside a positive opening reaction to the update, even if it is increasingly clear that patience will be required for the long haul as it moves through its five-year transformational plan.