It’s time to check in with this hotel leader

Investor nervousness is also reflected in the share price of Premier Inn owner Whitbread (WHB), which has fallen by more than 10 per cent since the start of the year. Given the group’s core business has just delivered record annual profits and cash flow, however, and has a new strategy for its food and beverage arm, it’s possible that pessimism has been overdone.

In fact, we think the current price presents an attractive entry point into a sector favourite, which offers asset-backed expansion at a discounted valuation.

Trusty chain of hotels

Whitbread's hotel arm contributed 73 per cent of total revenue in the year to 29 February 2024. The UK hotel market leader is on fine form, with the core Premier Inn UK arm growing adjusted profit before tax by 19 per cent to £588mn and delivering a record return on capital employed of 15.5 per cent.  

The domestic hotel market is Whitbread's bread and butter. Its pricing power in the UK was on full display as revpar rose by 10 per cent to £65.56. This was driven entirely by an 11 per cent increase in the average room rate to £79.76, with occupancy levels coming in flat. The annual occupancy rate of 82.2 per cent was still robust, however, and stands out against that of peers for being ahead of pre-pandemic levels. It is clear the Premier Inn brand holds significant sway for consumers. 

Premier Inn UK enjoys a 12 per cent share of the market on a room supply basis, and is grabbing business from smaller operators in what remains a beneficial environment for corporate giants. On a revenue basis, share came in at 8.6 per cent at the year end, slightly above FY2023. 

Chief executive Dominic Paul has flagged the "significant structural growth opportunity that exists following the decline in UK hotel supply" in the aftermath of the pandemic. The company doesn't expect UK market supply to return to 2019 levels until 2028. 

Over at Premier Inn Germany, Whitbread now has over 10,500 rooms with 6,000 more in the pipeline. Management argues it is “on course to become the number one hotel brand” and there have been signs of tangible progress. Adjusted losses narrowed by 28 per cent to £36mn in FY2024 and revpar rose by a fifth to £44.44. This was fuelled by a 15  per cent increase in the average room rate to £71.88 and a 240 basis point improvement in occupancy to 61.8 per cent.

The company still expects its German operations to break-even on a run-rate basis this calendar year. It also has around 400 more rooms in its sights for between now and March as it strives for a long-term return on capital of 10-14 per cent. There is still a degree of uncertainty, but if Whitbread can get expansion right it could catalyse a share price bump. 

Refreshing the food strategy

The food and beverage part of the business is dominated by Brewers Fayre and Beefeater. They –together with a sprinkling of other pub food brands – grew sales by 8 per cent to £790mn in FY2024. Despite this topline growth, however, the estate has underperformed the industry since the end of the pandemic and has been buffeted by food and labour inflation headwinds. 

Investors have known for a while that management has been considering selling off some underperforming sites and streamlining operations. It was no surprise, therefore, that the company this week announced £500mn of investment in what it calls an 'accelerating growth plan' that will remove loss-making branded restaurants. The plan is included in gross capex guidance of £550mn-£600mn for FY2025, up from £509mn in 2024. 

Over the next two years, Whitbread will sell 126 restaurants (agreements have already been struck on 21 of these for a sum of £28mn) and will convert 112 restaurants into 3,500 new hotel rooms. This will leave 196 “higher returning” branded restaurants in the portfolio alongside the almost 400 restaurants that are integrated at hotel sites. As part of the plan, 1,500 roles will be cut.

Management expects the plan to result in a drop in food and drink revenue of £180mn-£220mn over the next two years as it rebases operations, and it is due to lower adjusted profit before tax by £20mn-£25mn this year. However, it should put the future of the business on a surer footing over the longer term while emphasising that Whitbread is first and foremost a hotel group. 

Alongside the growth plan the company also announced a £150mn cost savings programme for the next three years as it tries to improve margins. The scheme will focus on operations, procurement and tech. The operating margin remains slightly below the pre-pandemic baseline as costs rose 8 per cent last year.

Management expects net inflation of 3-4 per cent on its £1.7bn UK cost base this year, after efficiency savings. The rise in the national living wage is the key cost headwind, while utilities are now 90 per cent hedged. Further efficiencies are an important step given stubborn inflationary pressures. 

Whitbread's resilient balance sheet provides a firm foundation for the shake-up plan. The majority of the Premier Inn UK estate is freehold (56 per cent at the year end) which is a differentiator against hotel competitors. We have argued before that the estate mix gives Whitbread options should its priorities and capital allocation plans change, and we think the evidence continues to back this view up. 

Leverage sat at 2.9 times lease-adjusted net debt to adjusted Ebitdar (cash profits adjusted to take out rent expenses) at the year end. This is high, but comfortably within the company's covenant ratio threshold of 3.5-times, as set out by its revolving credit facility. 

Strong free cash flow generation has allowed investors to be rewarded with a nice boost to capital returns. A 26 per cent increase in the final dividend, which took the full year increase to 31 per cent, was accompanied by a £150mn share buyback scheduled for the first half of the new financial year. This comes after £600mn-worth of buybacks were completed in 2024. 

A tasty valuation

The shares trade hands at an enterprise value/Ebitda multiple of six times, a significant discount to the five-year average of 16 times. Conditions have clearly changed a lot in the past five years, but the rating is also attractive when set against London-listed peers, and looks unjustifiably lowly. Holiday Inn owner InterContinental Hotels Group (IHG) trades on 16 times and Park Plaza owner PPHE Hotel Group (PPH) on 12 times. 

The future looks bright for Whitbread despite mixed current trading. For the seven weeks to 18 April, Premier Inn UK sales were down 1 per cent and food and drink sales were 2 per cent behind the same period last year. Given the tough post-pandemic comparatives, however, it is no surprise that growth is more subdued and we expect demand to pick up as summer hits. The company is still an outperformer and with a mean analyst target price of around 4,100p, there could be significant gains on the table for investors.