Whitbread's half year revenue increased by 17% to £1.6bn. This included a 14% increase in Revenue per Available Room (RevPAR) in the core UK business. Positive momentum has continued in the opening weeks of the second half in both the UK and Germany.
Together with cost savings, the revenue performance helped underlying operating profit grow 30% to £445m.
Free cash flow improved from £177m to £345m, whilst net cash at the half year end totalled £67m.
Strong hotel demand is driving a search for opportunities to grow the room pipeline towards the long-term potential of 125,000 room openings across the UK and Ireland. That's seen an increase in capital expenditure guidance for the full year to £500-£550m.
The interim dividend has been upped by 40% to 34.1p, and a further £300m buy-back was announced.
The shares were up 4% following the announcement.
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Our view
Whitbread's Premier Inn is now the UK's largest hotel chain and continues to enjoy an enviable brand position in the UK value and mid-range hotel sector. That's helped drive average revenues generated by each room more than 40% above pre-pandemic levels.
We're particularly supportive of the increased focus on attracting business customers which now make up about half of Premier Inn's accommodation revenues. This provides extra diversity in the customer base - meaning the group isn't reliant on one type of customer.
For now there's no sign of demand weakening but Premier Inn may need to pedal harder to sustain growth in the UK, particularly as economic headwinds mount. Careful management of the cost base has helped to deliver impressive profit growth despite the inflationary backdrop. For now inflation remains a challenge but if it does start to moderate further, this would give Whitbread some flexibility to adjust its prices in the face of a downturn without doing too much damage to the bottom line.
Looking ahead, Whitbread still sees more to go for in the mature UK and Ireland market, and sees a potential ceiling of 125,000 rooms vs current footprint of about 91,000. It's not the only chain with expansion plans. Too much additional supply could hurt profits if demand doesn't keep pace. But given the supply that's come out of the market since the pandemic, we're not too concerned. Meanwhile ongoing distress amongst independent hoteliers could allow Whitbread to acquire sites at advantageous rates.
If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. It has a much smaller footprint here and is yet to turn a profit. 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 it could be a while before Germany makes meaningful profits.
The balance sheet is also in good health. That's helped by the fact the group owns over half its hotels, rather than leasing them. What's more, its considerable re-investment plans of around £0.5bn for the current year should be fully funded by cash flows. This also helps feed into the group's ability to pay a dividend and supports ongoing share buybacks. As ever no pay-outs to shareholders are guaranteed.
We're impressed with Whitbread's continued progress and see long-term potential for both organic growth and further consolidation. The valuation sits below the long-term average and in our view, isn't overly demanding. However, the near-term challenges of rising costs and economic uncertainty remain very real. Investors should be prepared for some ups and downs.
Whitbread key facts
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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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