• Whitbread ‘open minded’

Whitbread CEO Alison Brittain told analysts that the board had “regular” discussions over the company’s structure.

The group said it would continue to look to Germany for growth and would invest where required to accelerate this.

The comment over structure was made at the company’s half-year results, as it was again facing chatter from observers over whether the group would be better being broken up.

Brittain said: “We have a regular and annual discussion about what we think is the right structure of the group and that isn’t a light five-minute conversation. We think about where we are today and the opportunities for the long term and how we have to unlock value for shareholders. We are enormously open-minded in that discussion. We think very hard about how we manage our property and deliver value to the group.”

Earlier this month saw Credit Suisse warn that Whitbread was vulnerable to interest from activist investors and private equity funds, having fallen to its lowest valuation relative to the market in 10 years.  Credit Suisse pointed to Whitbread trading at a new low relative to the FTSE250, at an 8% PE discount versus a 10-year average 17% premium.

The company suggested a number of options, including sale and leaseback of property and increasing the group’s gearing to 3.7 times Ebitda from the current 1.2. Most familiar to regular followers of Whitbread was the option of splitting the Costa Coffee business off, with additional plans to exit from the pub restaurant business and use the cash at Premier Inn instead.

The note cautioned: “Whilst this has been a recurring theme, it remains an undisputed fact that private equity is sitting on a record level of dry powder.”

While the question of structure was raised at the results by Credit Suisse’s Tim Ramskill, the company stuck to its line on the benefits of having a mixture of freehold and leasehold properties, with CFO Nicolas Cadbury commenting that “freehold property allows us to have superior sites. We will continue to explore moderate levels of sale and leaseback transactions to help provide liquidity help set future rental yield expectations”.

Langton Capital’s Mark Brumby commented that: “The group is not nimble but it is secure and well-financed.”

Despite Cadbury warning that “the economic outlook remains uncertainty and we remain cautious” Brittain was confident, adding: “Everyone is facing the same pressures, we are not alone. In these times the market leading brands tend to do well and the headwinds tend to hit those who are weaker financially”.

The CFO said that the group was able to use its efficiency programme – which has saved GBP60m over the past two years, out of a targeted GBP150m – to offset cost headwinds, including wage costs. For the Premier Inn business, Cadbury said that he expected underlying operating margins to be down to flat for the test of the year.

The group was tested on its revpar growth, which fell to 1.8% from 3.1% in the first quarter and lags the market.

Cadbury said: “We have opened 2,000 rooms in the first half of the year. Our nearest and dearest competitor also underperformed. Where we haven’t added capacity we are growing in line with the  market, and that is 65% of our capacity. We’re delivering constant returns on capital despite that new space.” The group was on track to open 4,200 rooms for the full year.

Brittain added: “In the hotel sector we have seen a gradual reduction in the market share held by the independents and this is likely to be reduced by living wage and rising costs. As the share of independents has been eroded, the shared of budgets has increased.”

Premier Inn continued to look to Germany, where the group invested GBP20m in the first half. Brittain said: “The budget branded sector is less mature – there is no clear market leader in Germany, which is unusual. There is also a higher level of domestic short-stay business travel.

Organic development tales a number of years, so we will explore all opportunities to accelerate expansion.”

The group now has nine hotels now in its committed pipeline in Germany, in addition to its existing hotel, resulting in an open and secured pipeline of over 2,000 rooms.

The impact of Brexit on Premier Inn and the wider market was prominent in the presentation, in particular the cost pressures around staffing.  Brittain said: “We’re not seeing anything yet on migration, but with 20% of our workforce EU nationals we are pleased that there has been an announcement which has clarified their rights.

“If this ends up as a talent war, we would undoubtedly win. We have retention rates which are increasing and we target that as a key KPI. We have great career access at any level and we have an efficiency programme which means that we could pay more if it was required.”

HA Perspective [by Katherine Doggrell]: Whitbread’s share price fell by 5% on the results, with the market disappointed that the Brexit bellwether was not benefitting from the increase in overseas tourism or the rise in staycations which has been much heralded. Fold into this that the growth in Germany is not happening at a rapid enough clip, with hotels taking longer to mature than in the UK.

Credit Suisse pointed out that the company’s share price peaked in April 2015, the day before former CEO Andy Harrison announced his retirement, but to blame Brittain would be to discount the impact of Brexit on a company which should be roaring ahead. The group acknowledged that Airbnb and the OTAs remained a force to be reckoned with and it is worth noting that Premier Inn brand may be well known in the UK – but is less so with the overseas visitors which are drawn to the fall in Sterling. With the company recording 95% of bookings direct, costs are under control, but profile is likely to be repressed without the aid of the OTAs.

The analysts are agitating for Brittain to move away from the more-of-the-same strategy, drawn to the value of real estate the group has on its books and the growing incongruity of having a coffee company and a hotel in the same business. A business which remains stolidly in a country where all the indicators points to a consumer under pressure.

Additional comment [by Andrew Sangster]: Premier Inn was never going to be a big beneficiary of any surge in overseas tourists visiting the UK given that it is overwhelming a domestic business. Similarly, staycationers are not likely to put Premier Inn at the top of their list when it comes to a UK holiday.

If Whitbread is going to be seen as a Brexit bellwether it is tied-up in its role as a bellwether for the overall UK economy. It looks as though the UK economy is going through a turn in the business cycle – how much of that is due to Brexit and how much worse it is going to be due to Brexit is a matter of conjecture.

What we do know is that the UK economy is looking precarious. According to the Deloitte Consumer Tracker, sentiment among consumers remains negative although there was a recovery after three consecutive quarters of decline.

Debt is a growing concern for many, and the Deloitte survey showed a four-percentage point decrease in net confidence about levels of household debt year-on-year. Any interest rate rises from the Bank of England are not going to be well received. And Deloitte said that this quarter’s uplift in consumer sentiment could prove an anomaly in a long-term downward trend.

Morgan Stanley, when looking at Whitbread’s numbers, reduced forecasts by between 2% and 4%  citing “economic gloom growing”. The analysts were sceptical that Whitbread would undertake much in the way of corporate restructuring saying “management sounded very committed to [the existing] structure”.

A challenge for Whitbread is doing something big enough to move the dial. Outside of the UK it has started to make progress with Premier Inn but it remains miniscule relative to the scale of the UK business with just nine committed sites.

A challenge is the high target for return on capital employed. In the UK Whitbread is achieving an average above 13% for its developments and it wants to be double digit in Germany. If Whitbread truly wants to be a significant player in Germany some dilution is necessary but it does not seem willing to take the risk.

Maybe that is the right decision for shareholders. Certainly, it is too late now for international to rescue Whitbread from the effects of a declining UK market during this cycle. If the UK economy does suffer badly, then Whitbread may turn-off even its UK expansion taps. This would turn the group into net decline, a sorry state for what has been one of the hotel industry’s biggest success stories.

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