Whitbread plans for Premier Inn expansion

True, Premier Inn's trading in the first half of the financial year may not have been too inspiring. While total UK accommodation sales growth was 4.8 per cent, on a like-for-like basis sales were only ahead 0.2 per cent due to weakness in consumer demand over the summer.

But the outlook is more promising. Despite already having the largest network of hotels in the UK, Premier Inn has identified a pipeline of 13,000 rooms to add to its existing 74,000 – 63 per cent of which are freehold and 37 per cent leasehold. The company estimated that 37 per cent will open in areas with no Premier Inn location, a quarter where there is a limited supply, and another 37 per cent where there are already Premier Inns but in locations that warrant more, such as London and other big cities.

The track record for UK room openings is impressive, with 14,000 rooms added in the past three years while maintaining occupancy levels at an “industry leading” level of around 80 per cent. Returns are helped by a high level of direct bookings (97 per cent in the first half). Some new rooms will be slightly smaller in size under the “Zip by Premier Inn” brand, which should also help support return on capital.

Germany is another target for Premier Inn's expansion. The German hotel market is about 35 per cent larger than the UK, but is similar to the UK market 10 years ago as it undergoes a structural shift from independent to branded hotels. This change is most pronounced in the budget sector. At the moment budget branded hotels represent around 6 per cent of the overall market share, compared with nearly a quarter in the UK. The goal is to have 33 hotels with 6,043 rooms across 15 German cities by 2021 through a combination of acquisitions and organic growth. It currently has 2,350 rooms across 14 German locations. Whitbread also has two hotels in the Middle East. 

Importantly, new openings should create attractive value for shareholders given the stability of returns on capital. Adjusted for leases, broker Numis calculates the hotels business has over the last 10 years consistently generated a return on capital employed (ROCE) of between just over 12 per cent and 11.4 per cent. This highlights the relatively defensive nature of its budget brand in what is a notoriously cyclical industry. Importantly, the broker's estimated post-tax return on capital of 9.3 per cent is comfortably above its calculated weighted average cost of capital (WACC) of 7.3 per cent.