Whitbread faces big test as hotels become core focus

Selling the Costa coffee chain gave investors what they wanted, and the remaining hotels business is doing well. Richard Hunter, head of markets at interactive investor, explains the numbers.

With the Costa sale to Coca-Cola (NYSE:KO) completed on 3 January, ahead of schedule, Whitbread (LSE:WTB) focus now turns sharply to its Premier Inn hotels business.

It remains to be seen exactly how the proceeds of the Costa sale are to be distributed, but the initiation of a £500 million share buyback programme is a good start which should provide some support to the share price. 

Next month, Whitbread will reveal the exact details, which are expected to be a mixture of paying down debt, perhaps some reduction to the pension fund deficit but, in particular, a significant proportion will likely be returned to shareholders.

Meanwhile, at first glance Premier Inn is plotting a stable path in uncertain territory. Total sales are up 2.5% in the third quarter, guidance for the full-year remains in line and the Central London market has been strong. 

Source: TradingView (*)  Past performance is not a guide to future performance

The company, which also runs the Beefeater and Brewers Fayre food chains, also continues on its quest for a portfolio of 100,000 rooms in the UK. Of particular strategic interest, though, is the burgeoning German hotel market, on which Whitbread has some designs. This market is likely to receive some specific management focus, with the company’s current model being seen as a good fit with the way the German market is developing.

As ever, there are also some challenges which need to be managed carefully. Outside of London the regional market has been weak, the reported numbers for occupancy, average room rates and revenue per available room are all marginally lower and the cost savings programme is also currently light of the figure which the company had previously guided. 

Meanwhile, Whitbread has admitted that the Costa sale could result in some management distraction as it is executed, while the company’s outlook is understandably cautious given the potentially parlous state of the UK economy post-Brexit, whenever that may be.

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Even so, investors had long been calling for the business to be carved up and in getting their wish, the shares have had a strong run, having risen 21% over the last year, in sharp contrast to the wider FTSE 100 index, which has lost 11% over that period. 

Despite some initial disappointment emanating from today's update, hopes will be high for the impending strategy day in February, while the market consensus for the shares has also recently ticked up to a 'buy'.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.