Whitbread returns more capital as profits surge

Whitbread's (WTB) shares have climbed by a third over the last year, helped by a resilient UK leisure market. Hotel demand is holding up in the face of cost of living pressures – according to software platform Siteminder, UK forward hotel bookings currently sit at 102 per cent of 2019 levels. The Premier Inn owner’s relatively cheap rooms are pulling in customers in a time of tightened budgets, with an average room rate (ARR) of £84 in the UK in the first half attracting strong leisure and business demand.

The half-year results make clear that things are continuing to move in the right direction after the strong first-quarter trading update in June, as the company raised its dividend by 40 per cent and announced a new £300mn share buyback programme. Upping the return of capital looks like a justified sign of confidence, with the company enjoying a favourable supply and demand environment and making progress in both its UK and German markets.

Whitbread continues to benefit from the contraction in independent hotel supply following the pandemic and a lack of new hotel construction. Management thinks that UK supply won't return to pre-pandemic levels for at least five years, and the company is reaping the rewards. In its key domestic market, Premier Inn made market share gains in the half and enjoys a share of almost 9 per cent. 

UK revenues rose 14 per cent to £1.5bn as accommodation sales climbed by 15 per cent. An occupancy rate of 84.4 per cent was down slightly against last year, but this remains a high level, and it supported a 10 per cent uplift in food and drink sales. Revenue per available room (revpar) came in at a £7 premium to the wider market. Return on capital employed came in at a record 14.8 per cent.

There were also positive developments in the highly fragmented German market, where Whitbread continues to make inroads. Losses narrowed to £14mn in the half as revenue climbed 81 per cent to £95mn, and management still expects to hit break-even in the country in 2024. The company now has 57 hotels in Germany, with 10,250 current rooms and a pipeline of over 5,800 rooms.

Expansion plans and the return of capital are supported by strong cash generation and an attractive freehold-heavy balance sheet. Adjusted operating cash flow was up £73mn in the half to £483mn. Once German operations become profitable, cash flows should significantly improve. 

Strip out lease liabilities from the balance sheet, and the company sits in a net cash position. Higher interest rates contributed to the profit increase, with bank interest income rising from £6.1mn to £25.8mn year on year. Lease-adjusted leverage was 2.5 times as at 31 August, well below the company’s target of 3.5 times. 

As Peel Hunt analysts note, Whitbread’s leading market position “coupled with a balance sheet that gives it the pick of sites and conversion properties, makes it terrible to be a competitor”.

Full-year guidance was maintained, other than a raising of the gross capex forecast to a range of £500mn-£550mn, up from £400mn-£450mn before. Cost inflation is still expected to come in at a manageable 7-8 per cent, and the company remains on track to open 1,500-2,000 new rooms in the UK this year. 

Current trading signals that growth prospects remain strong. UK accommodation sales were up 13 per cent against last year in the six weeks to 12 October, with food and drink sales up 8 per cent and forward booked revenues “well ahead of last year”, according to the company. In Germany, accommodation sales grew by 44 per cent. 

The City certainly thinks the good news will keep coming. The analyst consensus is for steady revenue and cash profit growth in the coming years (see graph). Broker Shore Capital said it expects to increase its forecasts for the company for the fourth time this year on the back of the results.

The shares trade at 16 times consensus forward earnings, according to FactSet. That is a significant discount to the five-year average of 38 times. With solid trading, a supportive balance sheet, pre-tax margins above pre-pandemic levels, and an increasingly attractive return of capital profile, we remain bullish. Buy.

Last IC View: Buy, 3,316p, 25 Apr 2023