Whitbread impresses

Shareholders in hotel, pub-restaurant and coffee chain operator Whitbread are used to being buoyed by news of how fast the group's Costa Coffee business is growing. However, it was the improved performance of the Premier Inn budge hotel division in the first quarter that was the main reason for cheer.

While Costa remained the growth engine for the group in the 13 weeks to the end of May, reporting a 8.4 per cent increase in like-for-like sales compared with 4.3 per cent growth from hotels, the strength of the pick-up at Premier Inns came as a welcome surprise. The hotel division is benefiting from a greater use of dynamic pricing to maximise room rates by exploiting fluctuation in demand and the combination of a 2.9 per cent rise in revenue per available room (RevPAR) and new openings helped drive sales up 12.4 per cent.

Strong growth at Costa continues to fuel speculation that the division, accounting for a fifth of profits, could be spun off, although management says such action is not under consideration. New openings helped drive revenues up by over a quarter.

There was good news, too, from Whitbread's pub restaurant business, which has been experiencing a tough time, with like-for-like sales rising 2.1 per cent. Recent industry data from the Coffer Peach Tracker suggests that consumers are holding up well to increased economic pressures where eating out is concerned.

Shore Capital says...

Buy. Whitbread's like-for-like sales were ahead by 4.5 per cent against our expectations of about 2 per cent, which is a sharp acceleration on the 1.8 per cent rise in the fourth quarter, albeit the quarter benefited from easier comparatives. Our preferred valuation methodology for Whitbread's shares is sum-of-the-parts analysis. Our valuation of 2,081p a share reflects 10 times cash profits for Costa Coffee and replacement cost of £60,000 per Premier Inn room and £1.5m per pub restaurant. With Starbucks valued at 18 times historic cash profits and the competitive landscape in the hotel market potentially becoming more favourable, our sum-of-the-parts valuation may prove conservative.

Investec Securities says...

Sell. Whitbread has reported a positive first quarter, albeit against relatively easy comparatives. We have nudged up our forecasts by 2.3 per cent to reflect a marginally improved outlook on hotels RevPar, with our discounted cash-flow-based price target moving up from 1,450p to 1,500p. Free cash-flow generation and soft returns in hotels and restaurants remain the cornerstone of our sell case and we retain our bearish long-term outlook. Whitbread faces domestic demand constraints in hotels and restaurants into the second half and in the following financial year.