Investors think Whitbread story has further to run

The overriding contributor to Whitbread (LSE:WTB)’s half-year profits is the UK Premier Inn brand, and it is in this area where the group continues to assert its dominance.

It has been a testing few years for the group. The sale of its jewel in the crown, Costa Coffee, to Coca-Cola in 2019 left some wondering how the remainder of the business would perform on a standalone basis. The subsequent pandemic drove a stake through its operational and expansionary plans, particular in its new target market in Germany.

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However, the latter has also proved to be something of a blessing in disguise. The subsequent demise of many independent hotels and a constrained growth supply has played into Whitbread’s hands, and in its own part of the market, the midscale and economy segment, the group is currently the largest player.

Also underpinning balance sheet strength is the fact that the majority of the group’s estate is freehold, which provides extra flexibility on a number of fronts. In addition, the group has seen a spike in demand to levels which now exceed those experienced pre-pandemic, with a return to travel boosting international demand for rooms, especially in London.

The current economic backdrop has also enabled growth in the business segment. With Whitbread estimating that the supply of new hotel rooms could remain constrained in the UK over the next five years, it sees an opportunity to bolster its number of UK rooms from the current 84,000 to 125,000.

Germany remains a potentially interesting expansion opportunity, although for the moment the unit has yet to turn any sort of meaningful profit, and revenues are but a small fraction of the overall group return. Even so, plans are progressing at a fair clip, and over the six months to 31 August 2023 accommodation sales grew by a further 82% and Food & Beverage sales by 31%.

There is less of a freehold presence for Whitbread here given that many of its locations are city-based, but the group remains committed and confident that Premier Inn Germany is an important part of its strategy.

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Meanwhile, the Premier Inn UK business continues to shoulder the vast majority of both growth and profit. In the period, accommodation sales grew by 15% (and by 55% compared to pre-pandemic levels), Food & Beverage sales by 10%, and Revenue per Available Room by 14%. In the last few weeks, the growth momentum has been maintained, with growth of 13% for Accommodation and 8% for Food & Beverage.

Put together, the half-year performance has added £73 million of additional adjusted operating cashflow to £483 million, providing the group with flexibility on both future expansion and shareholder returns. Overall, group revenues of £1.57 billion reflected a rise of 17% and were in line with expectations, while pre-tax profit of £395 million was 29% higher than the previous period and comfortably in excess of the estimated £360 million.

Indeed, the confidence of management in more immediate prospects is in evidence with a further hike to the dividend, which gives a projected yield of 2.5%. Perhaps more meaningful, though, is the announcement of a new £300 million share buyback programme, following on from the previously announced programme of the same size which has just been completed.

Of course, at any given time there will be challenges to overcome, and the growingly uncertain outlook for the UK economy could yet prove to be something of a sticking point. Even in Germany, there are some signs of faltering economic growth, while from a broader perspective the propensity of the consumer to spend on trips away, even domestically, could slow depending on the economy’s next direction of travel.

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Nonetheless, Whitbread is flexing its financial strength and looking to turn the screws further on any potential competition. For the moment, the strategy is proving successful, and combined with a targeted cost-cutting programme and the ability to raise prices, the hotel business seems to be in better shape than during pre-pandemic.

Even prior to today’s warmly welcomed numbers, the shares had risen by 28% over the last year, as compared to a gain of 10.6% for the wider FTSE100 index. The market consensus of the shares as a 'buy' is also an indication that investors have bought into a story which should have much further to run.