Whitbread’s first half revenue was unchanged at £1.6bn. Premier Inn UK revenues fell 2% due to factors including lower hotel occupancy and restructuring of the food & beverage arm. German accommodation sales increased by 22%.
Underlying operating profit fell by 7% to £413mn, due to a softer UK hotel market and disruption from the changes implemented at the restaurants.
The lower profitability drove a 17% decrease in free cash flow to £293mn. Net debt including lease liabilities was £4.5bn.
In the first six weeks of the second half, UK accommodation sales fell 1% with food & beverages falling 14%.
By 2030 Whitbread expects to add at least £300mn in underlying pre-tax profits and generate £2bn of capital to allocate to shareholder distributions or suitable investments.
Whitbread raised the interim dividend 7% to 36.4p and launched a £100mn share buyback.
The shares were up 3.9% in early trading.
Our view
Whitbread’s rocky start to the year has continued into the second half. However, the twin sweeteners of an increased dividend and further buyback were enough to appease investors. Of course, there can’t be any guarantees of further payouts to shareholders.
The UK's largest hotel chain continues to enjoy an enviable brand position in the value and mid-range hotel sector. That helped improve the profitability of its rooms and drive record levels of profits and cash flows last year, but it also makes comparatives more challenging moving forward. With inflation having fallen below the government’s target, further large price rises will be difficult for guests to absorb.
A more pressing question is whether the cumulative increase in room rates will have more than a temporary effect on demand. Another risk to watch is the potential for reduced visits from overseas if geopolitical tensions worsen.
Signs are emerging that indicate increased pressure on the UK hospitality sector, particularly impacting standalone pubs and restaurants. Whitbread’s plans to reduce its involvement in this segment, shifting focus towards integrated restaurants within its hotels would seem a shrewd move. Over a quarter of the 12,000 or so room openings planned over the next 4 years are expected to come from restaurant conversions. A lot of supply has come out of the market, but expand too fast and profit will suffer if demand doesn't keep pace.
On the costs front, expectations for 3-4% inflation on the UK cost-base remain in place for the current financial year.A further £150mn of cost savings have also been identified to be delivered over the next three years, which does give some flexibility to adjust prices in the face of a downturn.
If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. But it’s yet to turn a profit. So it could be a while before Germany makes a meaningful contribution.
The balance sheet is also in reasonable shape. 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 £0.6bn for the current year should be fully funded by cash flows and disposals of non-core assets. This also helps feed into the group's ability to pay a dividend and supports ongoing share buybacks. But if demand remains sluggish management may need to revise its spending priorities
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 a weaker demand environment remain very real. Investors should be prepared for some ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
Whitbread's management of material ESG issues is strong according to Sustainalytics.
Human capital management is considered above average with a strong development program in place. The company has appointed a management committee for overseeing ESG issues, but reporting is not in accordance with leading standards. As the owner of the UK's largest hotel chain, we would like to see an improvement in carbon intensity, and clearer targets on reducing its water usage. Further, management of product governance has been called out as average with no evidence that Whitbread's hotels and restaurants have received external quality certifications.
Whitbread key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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