Shore Capital strips Whitbread of long-standing 'buy' rating

Analysts at Shore Capital cut their long-standing 'buy' rating on Premier Inn operator Whitbread to 'hold' on Thursday, stating the firm's re-rating since its disposal of Costa appeared to be complete.

As Whitbread shares continue to perform relatively strongly since letting go of Costa back in August and with planned cash returns below the broker's expectations and little new news on crystallising the inherent value in its "extensive property portfolio", Shore Cap said the group appeared to be dependent upon its expansion plans into Germany.

"Although we appreciate the long-term attractions of the German hotel market, it will likely be several years before the region generates a meaningful contribution to group earnings, whilst the risk profile of its capital allocation has been raised," the broker said.

Regarding Whitbread's cash returns, Shore Cap said the group's intention to give back "at least" £2.5bn of the £3.9bn made in the disposal of Costa to shareholders was less than the broker had anticipated after management had previously stated its intention to return the “majority of proceeds”.

Shore Cap said the shortfall reflected a greater than expected one-off contribution to Whitbread's pension plan and a committed German acquisition, but also a more "pronounced short-term debt reduction".

The broker noted that, based on Whitbread's own guidance, this would leave the group with some £800m of potential leverage capacity to fund growth.

"Whitbread's current valuation is consistent with historic trends despite the outlook for the UK hotel market arguably being more mixed at present.

Its expansion plans in Germany are exciting, although it is too early to ascribe much value in our view until the group delivers on its initial committed pipeline of 6,000 rooms. Therefore, with limited upside to our fair value, we have taken the opportunity to cut our recommendation from 'buy' to 'hold'.