Reaction to latest updates from Whitbread and Taylor Wimpey

Whitbread

On its own, this is not an update to shoot the lights out, but the current trading position needs to be taken in the context of Whitbread (LSE:WTB)’s ambitious five-year plan.

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The plan targets adjusted pre-tax profit of at least £300 million and some £2 billion available for shareholder distributions by 2030. It also aims to increase its hotel room estate to 98,000 by that time, en route to its long-term target of 125,000. Within the plan, the German operation is expected to be making a significant contribution, with adjusted pre-tax profit of £70 million emanating from what should then be 20,000 rooms. In addition, the group is optimising its Food and Beverage offer, which includes converting restaurants as well as integrating the restaurant offer where possible into existing hotels, away from the more traditional standalone sites 

As such, the Food and Beverage unit is suffering either from the exit from some of the existing sites or disruption caused by the new conversions, and sales are running some 14% shy of the corresponding period last year. Some of this slack has been picked up by other parts of the business, such as the accelerating growth in Germany, as well as a cost reduction programme which aims to deliver £50 million of savings in this year as a whole.

The irony of the ravages wrought by the pandemic is that it provided Whitbread with some major opportunities given a structural shift in the sector. Many independent hotels went to the wall as a result and there was next to no new hotel construction activity, which opened up the market to the larger operators. This contributed to Premier Inn becoming the largest hotel chain in the UK, with a 12% share of total hotel room supply. In relative terms, Premier Inn has consistently outperformed the market since the end of the pandemic.

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In the 13 weeks to 28 November, the numbers are mixed with total group sales down by 2% to £763 million, Premier Inn UK accommodation sales were flat versus the previous year (but up 51% compared to pre-pandemic levels), accompanied by a 3% decline in Revenue per available room. Rather more promisingly, the German unit reported a rise of 23% in accommodation sales, albeit from a lower base and, after some years of investment and incremental brand awareness, is expected to move into profitability this year.

The impact of the Budget measures are estimated to equate to cost inflation of between 5% and 6% this year, although this should be reduced to between 2% and 3% given the mitigating effects of the cost savings. In the meantime, the £100 million share buyback programme was completed in November and a current dividend yield of 3.3% is average rather than punchy compared to its premier index peers.

The shares have struggled against the backdrop of a tough consumer environment, especially in the UK, and have fallen by 19% over the last year as compared to a gain of 9.8% for the wider FTSE100. However, some solace might be taken from Whitbread’s further update on current trading, where accommodation sales at present are up by 2% and 37% in the UK and Germany respectively. 

The group is one which is well regarded for its prospects and, if achieved, the strategic plan would mark a successful step-change. The market consensus of the shares as a buy reflects that the group has some underlying investor support in achieving this aim.

Taylor Wimpey

Housebuilders have had something of a relief rally over recent days, given a softer UK inflation reading which reignites the possibility of interest rate cuts and in turn an increase in mortgage affordability and interest.

However, the torrid backdrop of more recent times is well known, with higher interest rates, lower consumer confidence and general cost of living pressures all working against the industry. High build cost inflation, a lengthy and laborious planning permission process and pressure on operating margins given some fixed costs are also providing headwinds, while the previously announced Competition and Markets Authority probe into issues including poor build quality and potential price collusion was an unwelcome development.

Ahead of its results for the year ended 31 December, due on 27 February, Taylor Wimpey (LSE:TW.) said total group completions fell by 2.4%, overall Average Selling Prices dipped by 1.5% to £319,000 and the group suffered from something of an affordability stretch in the South of England.

More positively, the net reservation rate per outlet per week ticked higher to 0.75 from a previous 0.62, while a forward order book of £1.995 billion compares favourably with the corresponding £1.772 billion from a year before. In addition, the group retains a strategic landbank of 79,000 plots, primed for readiness in the event of a sustained uptick in customer demand.

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Net cash of £565 million also leaves the group well-set in terms of financial firepower, such that the current dividend yield of 8.4%, an inviting attraction for income-seekers should not be troubled.

The group is maintaining its previous guidance of adjusted operating profit for the year of £416 million, with an estimated 19% gross margin. The initial share price reaction reflects some disappointment to a non-committal outlook and adds to a decline of 21% over the last year, as compared to a rise of 9.8% for the wider FTSE100. Even so, and in the midst of a notoriously cyclical sector, fortunes will inevitably change, which partly explains the embedded confidence in longer term prospects and the market consensus of Taylor Wimpey as a buy.