In the first half, Whitbread saw revenues more than double to £1.4bn. That's 25% growth over pre-pandemic levels.
This was driven by a strong rebound at Premier Inn as meetings and events returned to both the UK and the small but faster growing German operation. On the downside, trading conditions in the value end of the pub restaurant market remain challenging.
Underlying pre-tax profit was up to £272m against a loss of £57m last year, and up 15% on a three-year view.
Free cash flow was up 24% to £232.6m, and net cash levels improved from £141m to £182m. We also see the return of an interim dividend, with Whitbread intending to pay out 24.4p per share.
Whitbread remains confident in the full year outlook, but the effect of inflation and accelerated investment has seen it guide costs up by £60m.
The shares fell 2.1% in early trading.
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Our view
Whitbread's Premier Inn is a strong name in the UK value and mid-range hotel sector in our view. We're particularly supportive of the increased focus on attracting business customers. This provides both a growth opportunity and extra diversity in the customer base - meaning the group isn't reliant on one type of customer. The result of this attractive offering has resulted in higher occupancy and room rates, boosting revenue.
The UK enjoys a loyal customer base, with three quarters of bookings coming from returning visitors. Keeping hold of that customer loyalty is why the group's upgrading its standard rooms, and broadening its premium accommodation offer in a drive to recoup margins. We think this is the right move.
Whitbread still feels there's more to go for in the UK and Ireland, and sees a potential ceiling of 125,000 rooms vs current capacity of 82,700. Against pre-pandemic levels, the UK market share has made market share gains in each of the last 6 quarters, but that rate of growth is slowing. Premier Inn will need to pedal harder to sustain growth in the UK particularly as economic headwinds mount.
And that's where Germany comes in. Premier Inn has a much smaller footprint here - there are over 7,000 rooms in the pipeline which would see the German estate double in size. Whitbread's aiming to become the number one budget operator in Germany. About 60% of rooms in Germany are run by private hotels- we think there's opportunity for an experienced hotelier like Premier Inn to establish a foothold. But with Germany likely to enter a recession in 2023 it could still be a bumpy ride. Germany isn't yet turning a profit, but for the current financial year, expected losses of £40m to £50m are less than originally thought.
It's not all good news though. The food and beverage arm which includes the likes of Beefeater and Brewers Fayre has been lagging pre-pandemic levels. Given the squeeze on consumers we aren't surprised. If anything this gap is worsening.
Margins have taken a hit from inflation but Whitbread is actively managing this, with £40m of cost savings delivered in the last financial year and over £100m of further savings planned over the next three years. When it comes to utility costs, Whitbread's UK operations are locked in for the current financial year, and the same is true for 70% of next year's requirement.
We take comfort from Whitbread's strong balance sheet, which leaves it better placed than most to deal with rising interest rates. That's helped by the fact the group owns over half its hotels, rather than leasing them. That should also help Whitbread borrow more if needed. What's more, its considerable re-investment plans of over £0.5bn for the current year should be fully funded by cash flows.
The dividend appears well-covered by profits too, and we think there could be scope for shareholder returns to increase in the future. As ever no dividends are guaranteed, and please remember yields are variable.
The group trades below its 5 year average valuation, a reflection of the near term challenges with rising costs and the potential for consumer behaviour to shift with a recession looming.
Whitbread key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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