Whitbread raises room target as hospitality struggles

The current headwinds crushing hospitality present opportunities as well as downsides and Whitbread (WTB) is keen to take advantage. The Premier Inn owner said that “a declining independent sector” is boosting its own growth potential and it has raised its long-term hotel room target in the UK and Ireland to 125,000.

Begbies Traynor partner Julie Palmer said that this “could be the polite way of saying the smaller hotels Whitbread competes with are simply being overwhelmed by rising bills such as energy and labour and throwing in the towel”. Pretty much. While this looks like good news for Whitbread’s long-term growth, it shouldn’t obscure the fact that the company has problems of its own when it comes to cost inflation. It expects £60mn of additional costs in financial year 2023, a figure which represents almost a fifth of this half’s profits, driven by labour, utilities, and food and drink inflation. And while utilities have been fully hedged for next year, £20mn of further costs are forecast for 2024, with 70 per cent hedging in place.

But taken as a whole, these results represent progress. Profits outstripped pre-pandemic levels with pent-up demand, a net 487 new rooms in the UK opened in the half, better pricing, and a reduced pool of competitors all having an impact. Revenue per available room soared by a quarter against 2019 to £62 in the UK, while in Germany established hotel operations were profitable for the first time in the second quarter. And current trading is solid – for the seven weeks to 20 October, total UK sales were almost a quarter up on the same period in 2019, and total accommodation sales grew by 37 per cent. Saying that, while hotel sales are performing well, it is the food and drink side of the business that is struggling, with sales not expected to return to pre-pandemic levels this year.

With a strong balance sheet – lease adjusted leverage fell to 2.8 times in the half – and solid brand equity Whitbread is well positioned in the market. A committed pipeline of 8,875 rooms is encouraging. As is the valuation – the shares trade on an undemanding 21 times forward earnings, according to consensus analyst forecasts from FactSet. This is below the five-year average of 37 times, and cheaper than hospitality peers such as Hilton World (US:HLT), which trades on 24 times, and Accor (FR:AC), which trades on 23 times. Hold.

Last IC View: Hold, 2,858p, 28 Apr 2022