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Whitbread looks attractive

The long-term potential of the well-established company is not reflected in its valuation at present
March 10, 2016

Shares in Premier Inn and Costa Coffee owner Whitbread (WTB) have established themselves as an investor favourite over the years, so are rarely available at a truly attractive price. However, we feel a good entry point may have emerged as some key valuation multiples are touching near-three-year lows following a period of weaker trading.

IC TIP: Buy at 3730p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Dominant position
  • Cheap valuation
  • New chief executive
  • Regional hotel performance strong
Bear points
  • Growing competition
  • Growing hotel revenues down of late

There has been a fall in like-for-like sales at both Whitbread's Premier Inn and Costa Coffee chains (see chart below). Anxiety about this, which has been reflected in share price weakness, is understandable given the substantial amounts of cash Whitbread has been investing in growth - capital expenditure has averaged 255 per cent of depreciation over the past five years and slowing like-for-likes could prove a precursor to a fall-off in returns on the group's substantial spending.

However, we think these fears are likely to prove misplaced given the dominance of the Premier and Costa brands and management's investment track record. Indeed, growth in return on capital employed from 12.9 per cent to 16.8 per cent over the past five years suggests that while Whitbread may have been spending a lot, it has been doing so wisely.

 

 

Amid the concerns about the outlook, there are also things about each business to feel positive about. The regions account for roughly 80 per cent of Premier Inn's rooms and revenue per available room - known as RevPAR - has remained strong. It grew by 1.5 per cent in the 11 weeks to 11 February 2016 and is expected to remain a robust counterweight to the softening in London, which is being driven by a glut of supply. It's fair to say that Travelodge is becoming a higher-quality competitor, according to a recent Which? survey, but it still scores well below Premier Inn at the moment.

At Costa, like-for-likes should benefit from the first price rise in several years. And while the chain did suffer due to a warmer winter - the Footfall Regional index showed footfall fell 2.5 per cent year on year in October-December - footfall was up nearly 3 per cent in the usually weaker January. The chain also has the 'enterprises' division which installs Costa Coffee self-service machines in shops and petrol stations. The group has more than 5,000 units now, more than 400 of which are overseas. Management's aim at the most recent half-year results was to have approximately 8,000 units by 2020.

 

 

In the near term, management has said performance will be in line with guidance when it reports its full-year results in April. This will also be new chief executive Alison Brittain's first full-year results presentation and if she takes any action on spending or costs, this could have a positive impact on the shares. At the half-year results in October, then chief executive Andy Harrison had pencilled in £700m of investment, and spending is expected to be maintained at that level in the new financial year, meaning roughly 5,000 net new UK rooms and approximately 230 new Costa stores worldwide - so there is wriggle room.

Whitbread's restaurant chains, including Beefeater Grill and Brewers Fayre, registered strong like-for-like sales growth of 2.3 per cent in the 11 weeks to 11 February, helped by its improved menus, better procurement and improved usage of the data gleaned from its loyalty cards.

WHITBREAD (WTB)
ORD PRICE:3,730pMARKET VALUE:£6.81bn
TOUCH:3,729p-3,732p12-MONTH HIGH:5,475pLOW: 3,641p
FORWARD DIVIDEND YIELD:2.5%FORWARD PE RATIO:15
NET ASSET VALUE:1,165pNET DEBT:34%

Year to 26 FebTurnover (£bn)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
20132.03356.5149.157.4
20142.29411.8179.068.8
20152.61488.1214.082.2
2016*3.55548.7234.090.1
2017*4.01576.2245.094.1
% change+13+5+5+4

Normal market size: 300

Matched bargain trading

Beta: 0.85

*Numis Securities, adjusted PTP and EPS figures