Whitbread interims disappoint but Germany offers Premier potential

First half results from Whitbread showed evidence of a slight summer slowdown, with revenues at its Premier Inn hotels and Costa Coffee arms both softening but tight cost control percolating through to a solid profit performance.

Group revenue for the six months to 31 August rose 7.4% on the previous year to £1.67bn as Premier Inn's revenue per available room (revpar) rose 1.8% after a strong first quarter at 2.9%, while like-for-like sales from Costa slowed to 0.6% for the half-year from 1.1% in the first quarter.

Premier opened more than 2,000 hotel rooms over the six-month period, while a digital push led to 95% of guests booking directly on the company website.

Chief executive Alison Brittain sees growth coming from the UK and especially the 35% larger market of Germany, where a pipeline of over 2,000 rooms has been secured to tap the "structural growth opportunities" seen in the much less mature and highly fragmented 'branded budget' sector.

The performance of the pub-restaurants business improved with 1.1% LFL sales growth, leading to revenue for Premier Inn and restaurants rising 6.4% to £1.05bn.

Costa, where the UK and China are the growth markets, lifted revenues 9.1% to £622m as a net 108 coffee shops were opened in the first half to take the total to 2,326, with new food ranges launched to an "encouraging" reception.

However, Costa's underlying operating profit in the UK fell 4.6% as margins were squeezed by higher labour costs, business rates and the effect on coffee imports from the weaker pound.

An efficiency programme being pushed through by Brittain offset these rising costs to some extent and across the group has taken out £60m of costs over the last two years.

As a result, group underlying operating profit still rose 7.1% to £342 and underlying profit before tax by 6.7% to £328m, which was ahead of the consensus forecast of £320m.

Statutory profits were much stronger due mainly to one-off costs of restructuring in the previous year.

Underlying earnings per share rose 7.4% to 143.7p and the interim dividend was lifted 5% to 31.4p.

Brittain said she was pleased with the progress made after the restructuring and in executing her plan from last November, with earnings per share up 7.4% in the half and return on capital of 15.4%.

"Our plan is based on growing in our core UK markets; focusing on structural growth opportunities for Premier Inn in Germany, Costa in China and Costa Express; and strengthening our capabilities and efficiency to deliver these attractive opportunities."

With the international business now profitable after an exit from France, earlier this month Brittain snapped up full control of Costa's southern Chinese venture for £35m where, with only 4,000 specialist coffee shops in the country the market is expected to more than double in size by 2020.

Outlook guidance for the full year was unchanged.

INVESTORS DISAPPOINTED, ANALYSTS SANGUINE

Whitbread shares fell more than 4% on Tuesday morning to 3,778p.

Analyst Nicholas Hyett at Hargreaves Lansdown said rapidly increasing revenues were not enough to guarantee Brittain a good night’s sleep, due to the raft of cost headwinds.

"The group has done a sterling job of managing those cost pressures in the first half, grinding out efficiencies across both businesses, but they still left Costa profits flat.

"Many of the factors driving those cost increases have now been lapped, so input inflation should ease from here. However, having pushed through price increases itself, Whitbread will be well aware of the pressures facing the purses of UK consumers.

"Weaker like-for-like numbers this time round will add to worries that customers are feeling the pinch.”

Tim Barrett at Numis noted that the drag from new Premier Inn openings had continued, with growth at 3.3% in areas without new capacity growth.

He hailed growth in EBIT margin despite wage pressures and system investment, with a 60 basis point increase well ahead of full year guidance of 'flat to -20bp' as new capacity and the efficiency programme added to profits, while recent investments including a new IT system will start to impact from the second half.

For Costa, he noted margins fell by 90bp versus previous guidance to a 120bp fall for the full year. While the international
business broke even with a £4m profit, "this serves to underline the weakness of the UK", where EBIT was down 5%.

Canaccord Genuity's Nigel Parson said the interims were "fractionally better" than he expected, with Premier Inn performing "marginally better" helped by a strong London out-turn and Costa and the pub restaurants "much as expected".

"The stock has traded sideways for 18 months and this is unlikely to change post today. Expectations are low but we remain buyers because it still has an excellent balance sheet and good cash generation which gives it an optionality that is not fully reflected in the share price, on our view."