Morgan Stanley slices Whitbread on growth worries

There is plenty to like about Whitbread but forecasting like-for-like sales to remain weak, Morgan Stanley has cut its recommendation to ‘equalweight’ from 'overweight'.

Among the factors in favour of Whitbread, Morgan Stanley highlighted that first-half profits growth beat expectations, that expansion plans are on track with the £150m efficiency programme offering potential to be expanded, with a solid turnaround in international markets and "nearing a tipping point".

Analyst Jamie Rollo thinks the management team "is doing all the right things" and finds much about the company attractive, with Premier Inn's single brand, single market, owned/leased unfashionable model "arguably the 'best' listed hotel chain globally" in terms of performance and Costa is second largest coffee company globally and offering upside from expansion and new products.

A sum-of-the-parts valuation for the shares of £45 is 20% above the current share price.

However, investors are focused on weaker LFL sales rates, with strong total sales nearly all from new space and so Rollo said weak LfLs "mean questions may linger about cannibalisation and sustainability of returns".

With UK economic gloom growing, and no evidence of Whitbread's internal levers yet driving LfLs, he cut his LfL sales assumptions to 1% revpar growth for Premier Inn in the current year and next, and for Costa's LfLs to grow 0.5% this year and 1.5% for 2019, leading to 2-4% EPS downgrades.

"This is not that material as the company has relatively high margins and an efficiency programme. However, if things get progressively weaker there is a risk Whitbread curtails the expansion plans, which would take EPS growth down to around zero, a material downgrade."