Morgan Stanley analyst Jamie Rollo gives five reasons to stay positive about Whitbread following its announcement of faltering like-for-like sales in its third quarter.
Rollo downgraded FY20-22e PBT by 3-7% following Whitbread’s more cautious outlook.
He added: “This is a disappointing downgrade as we had read management’s previous optimism about significant efficiency gains to mean it could continue to offset modest top-line pressure. However, the company has been accelerating its £250m programme and finished it early, and does not want to cut back meatier costs and lose competitiveness at a time when weaker players could be squeezed if we enter a cyclical downturn. We think that the additional German investment is a positive and not something to worry about, but we were surprised about food still being a headwind given relatively stable currency YoY and falling inflation, and note the response about limited additional cost savings in the event of a further RevPAR slowdown may make Whitbread more exposed than expected. While there is less downside protection than we had hoped, we think Whitbread remains relatively resilient: its operating margins are relatively high at 23% (30% in Hotels ex central costs and Restaurants), a flat profit performance in FY20 would not be a poor result given the tough macro conditions, and the balance sheet is strong (<1x basic leverage post cash return).”
On the positives, he said: “1. We expect Whitbread to announce a £2.9bn cash return at its 13 February investor day, including the £0.5bn share buyback just commenced. This is equivalent to a significant 33% of market capital, technically share price supportive as well as limiting downside if we see a further market sell-off or Brexit de-rating.
“2. Whitbread is a resilient hotel operator, both in terms of concept (budget hotels are less cyclical and benefit from trading down), operating model (mostly owned Ebitda, which has high margins, stable margins over the past decade), and balance sheet (we assume it de-leverages to about one times basic net debt:Ebitda, giving interest cover at 15 times).
“3. Premier Inn is one of the world’s strongest hoteliers from an investment standpoint, and we cannot think of another asset-heavy listed hotelier enjoying its KPIs on occupancy (about 80%), TripAdvisor (average score of 4.5), direct distribution mix (97%), unit expansion (6%), and real estate backing (65% freehold tenure mix).
“4. Germany could cause a valuation re-rating if the company can get to a more material position here (currently we estimate it will generate £20m Ebit in three years, 3% of the group), given this is a structurally more attractive market than the UK (branded budget share 5% versus 23% UK).
“5. The company’s £5bn-plus real estate backing is about 80% of EV, implying the theoretical operating company is trading on two times to three times Ebitda. We also note the share price barely moved, suggesting either the bad news is already priced in, or that some investors may be thinking that bad news is good news if it leads to more activist pressure, or that the technical cash return support is working.”
