Whitbread warns near-term profit may be weaker
After selling its Costa Coffee arm, Whitbread urged investors to accept slowing in sales and profit growth for its Premier Inn hotel chain was necessary amid weaker UK consumer demand and its plans for continued major investment in growth.
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The £3.9bn Costa sale was approved by shareholders earlier this month but directors said the "exact amount, timing and method" of the cash return to investors was yet to be determined. Though Costa grew profits 3.5% to £47m its accounts are listed in the half-year results as discontinued business.
Ongoing business, chiefly Premier Inn and its pub-restaurant brands, including Beefeater and Brewer’s Fayre, grew revenue 2.6% to £1.08bn in the six months to 30 August. This is down from the 6.1% group-wide growth seen in the last full year and the 7.4% seen in the first half of last year.
Premier Inn increased total UK accommodation sales 4.8% as it continued to invest in new openings, with the current 795 hotels increased 3.1% from this time a year ago.
On a like-for-like basis, accommodation sales growth was just 0.2%, while revenue per available room fell 0.9%. This was an improvement from the LFL decline of 1.6% in the first quarter of the year. Like-for-like food and beverage sales, which includes the pub-restaurant chains, was down 2.6%.
Group underlying profit before tax of £270m was up 2.5% on the same period last year. This was slower than the 4.5% growth seen in the last full year and the 6.7% in the first half of last year. Underlying basic earnings per share from continuing operations were 118.2p grew 2.4%, while the dividend was lifted 4% to 32.7p.
Premier Inn's break-neck capacity growth has seen more than 14,000 new rooms added in the UK in the past three years, which the company boasted was 2.5 times more than the combined total added by Travelodge, Holiday Inn Express and Ibis. With the number of rooms standing at 74,070 at the half-year stage, management are eyeing a total of 100,000 in the not-too-distant future, including the new Zip extra-value format launched earlier this week.
Chief executive Alison Brittain said the board was committed to its investment plans, including the opening of 4,000-4,500 rooms in the UK and Germany over the full year, but that there "is a degree of caution on demand" due to "the recent economic and political environment, along with inflationary pressures in the consumer sector", and so amid a soft UK consumer environment "our near-term profit growth may be lower than in previous years".
"However, Whitbread is confident that the ongoing efficiency programme can continue to offset a significant proportion of inflation over the short to medium term," she said.
Brittain said the "highlight" of the first half was the agreement for the sale of Costa but that "much work" was still needed to ensure a smooth separation, expected in the first half of next year. "We intend to return a significant majority of the net cash proceeds to shareholders, although the exact amount, timing and method will be determined following discussions with stakeholders, including our shareholders, pension fund and debt providers. The sale of Costa now requires Coca-Cola to obtain regulatory approval in the EU and China."
She announced that an investor day in February will be held to give an update on plans to access what the board sees as "significant structural growth opportunities available to Premier Inn in the UK and internationally", as well as discussing "the optimal capital structure and property strategy to support our growth plans".
Shares in Whitbread fell almost 2% to 4,383p on Tuesday morning, their lowest since the Costa sale announcement.
Analysts at Liberum noted that the company have "slightly nuanced" their expectations to return a significant majority of the proceeds to shareholder, after payments to reduce borrowings from £88m excluding leases and pension fund deficit of £158m, unless more value creating opportunities arise.
"It still has only 1 hotel (210 rooms) open and trading in Germany with an acquisition pipeline of 19 hotels (13 already trading) and organic pipeline of 13 hotels due open by 2021 bringing the total to 33 (6,043 rooms). While the fundamentals of the German market are attractive, the complexity of property ownership structures has hampered the pace of role out with incremental leases being slow to negotiate and there is a risk that Whitbread is forces to pay significant ‘strategic’ premiums to gain critical mass," Liberum said.