Whitbread left exposed after Costa disposal

Whitbread's reliance on hotels makes it more vulnerable to economic shocks, writes our head of markets.

Now without the significant buttress of the Costa business, Whitbread (LSE:WTB) is finding life tough.

The majority of the group is now represented by Premier Inn, and therefore largely in the hands of the hotels market. As business confidence starts to wane given the uncertain economic outlook in the UK, let alone the possibility of recession, two of the corporate expenditure lines which are traditionally sacrificed first in an effort to curb costs tend to be advertising and business travel.

The latter has clear implications for Whitbread, even within its home market, and especially in its regional presence, where business stays are an important part of its model. 

In an effort to spread its wings, Whitbread is also looking to expand into a German market which lends itself to this business model. Indeed, the longer term strategy is understandable and the pipeline has now moved up to over 7,000 rooms, but the current timing is unfavourable, with Germany currently facing its own economic turmoil.

These factors have fed through to an underwhelming performance, where a 1.6% decline on return on capital is accompanied by a 4.1% drop in adjusted pre-tax profit, although this is partly attributable to costs relating to the Costa sale.

Meanwhile, revenue per available room has also dipped by over 5% and the company's own outlook is uninspiring, if understandable, in highlighting the pure economic uncertainty in the immediate future.

Even so, the company retains a robust balance sheet, underpinned by a strong property portfolio. This year's shareholder returns have been largely boosted by the Costa disposal, as opposed to a dividend yield of 2.4%, which is less of an attraction to income-seekers.

While the company is clearly open to cyclical swings, it nonetheless remains well-positioned to benefit from any economic uptick, however difficult that may be to see at the current time. In addition, a continued focus on costs and streamlining should leave the company in better shape to weather the challenges ahead, while the introduction of "Premier Plus" rooms is an interesting development.

Unfortunately, the fact remains that following the disposal of the Costa brand, which provided a constant turbocharge to the numbers, Whitbread's reliance on the hotels market makes the company less diversified and therefore more vulnerable to economic swings.

The shares have underperformed of late, having declined 13% over the last six months and 7% over the last year, the latter of which compares to a 1.7% increase in the wider FTSE 100. With the real potential of economic clouds on the horizon, the market consensus of the shares has now swung to a sell in the absence of any sustained cheer from the company.