M&C Report takes a closer look at the half-year results for Whitbread, the leisure operator: Growth Whitbread said it’s “on track” to reach its five year growth milestones that it set out in April. The target is: increase Premier Inn by 50% to 65,000 rooms; double Costa to £1.3bn system sales and 3,500 stores worldwide, and have 3,000 Costa Express units. Capex Total capex in H1 was £129m, with £100.7m in Hotels and Restaurants and £28.3m in Costa. Capex is split between acquisition and development (£91.1m) and maintenance (£37.9m). Capex for the year is forecast to be around £325m. Inflation Underlying inflation across the group is 2-3%, said group finance director Chris Rogers, but the major hike has been in coffee prices - the company uses 6m kg of coffee per year. The inflation has cost Whitbread £2m, even after the increase is shared two thirds with its franchisees. Rogers, however, said it’s a “problem we can deal with in the business”. The increase has not been passed onto consumers - only the VAT rise has shifted prices in recent times, Rogers said. Olympics Chief executive Andy Harrison downplayed the impact he believes the 2012 Olympics will have on the company. “We’ve got 15 hotels that are within the area of the Olympics. But that’s 15 out of 600. I think the impact on Whitbread will be quite modest.” Costa: openings Costa currently operates 2,003 stores: 1,302 in the UK and 701 overseas - it operates in 25 companies. In total 132 (net) stores opened in H1, of which 67 are company operated (43 in the UK) and 65 are franchise sites (UK: 42). In total 88 UK stores were refurbished in the period. Sales in the international business grew 15,1%, meanwhile, “with China doing particularly well”. Costa: Costa Express Whitbread converted 135 Coffee Nation units to Costa Express in H1 and added 65 new Costa Express units. “There are 734 Coffee Nation units remaining and we expect to have converted over 500 in total by the year end and added a total of 250 new units,” the company said. Since its launch in March with Whitbread’s acquisition of the Coffee Nation business, Costa Express has “grown rapidly and is performing ahead of expectations” - old Coffee Nation units typically achieve a 20% sales uplift once they are branded Costa Express. The Coffee Nation/Costa Express business contributed £12.4m in revenue in H1. Costa Drive Thrus There’s a potential for 75 Costa Drive Thrus across the country, Whitbread said. Three currently operate - in north Kent, near Swindon and in Nottingham - and the company said sales are “ahead of expectations”; a further 10 are “in the pipeline”. Rogers said around 40% of customer use the drive through lanes, while the rest park up. Restaurants: promotions Brands with lower price points are performing better in the “increasingly value driven market” since the consumer downturn in early 2011. “Our brand with the lowest spend per head, Brewers Fayre, is outperforming our two higher priced brands, Beefeater and Table Table,” Whitbread said. Some of the value offers introduced recently include main meals from £4.99 in Beefeater and Table Table, while in Brewers Fayre its all-you-can-eat for £5.99 Buffet Place concept is “proving very popular” - there are now 77 Buffet Places across the estate, up 50 over the period, with plans to roll out a further 25. Drinks promotions and all-you-can-eat breakfasts from £7.99, with children eating for free, have also been introduced, “and are in the process of rolling out free wifi”. Harrison said: “We are working hard to sharpen up our value proposition. It’s lots and lots of smaller things rather than one silver bullet.” He said it would take “quite a few months” for all the changes to go through the business. The growth in value-led promotions has meant that while like-for-like sales are down 1.6%, total covers are up 0.8%. Total sales growth of +0.5% is due to new openings. Premier Inn: performance Total room nights sold in the period increased 7% to £6.3m, “benefitting from both good business and leisure demand”. Average room rate was up 3.4%, with occupancy up 0.8 percentage points to 79.4% and revap up 4.4% - growth was across both midweek and the weekend. Like-for-like revpar increased 11.4% in London and 3% in the provinces. Its Business Account programme for business users now constitutes 26% of Premier Inn sales, generating £102.6m in revenue in H1. There are now more than 16,000 live accounts in the programme, up 6.4% on last year. Premier Inn: expansion Overall, the company opened 11 hotels with 1,265 rooms and five new restaurants in the UK in H1. Internationally, one hotel was added, its second in India, bringing the estate to five sites (1,055 rooms) in the Middle East and India - its first hotel in Abu Dhabi is set to open later this year. The total estate at the end of the period stood at 607 hotels, 45,694 rooms and 383 restaurants. Expansion across the Middle East, Asia Pacific and India will be under a so-called capital right strategy, under a number of different ownership models; £50m has been invested to date in the strategy, with £30m expected to be spent each year. Premier Inn: innovations and refurbishments A new dual pricing structure has been introduced with two new rates: Premier Saver (non-refundable and payable at booking) and Premier Flexible (fully refundable payable at check-in or booking). The new structure has helped the division achieve “more efficient pricing, enabling us to better optimise midweek and weekend revpar”. Whitbread also introduced a new customer relationship management system in August to offer promotions to the 6m customers on its database. Meanwhile, around 1,940 hotel rooms were refurbished in the period. Exceptional items A credit of £39m was announced in total. The sale and leaseback deal on seven Premier Inns, completed in the period, generated a profit on disposal of £24.8m. There was a £12.9m credit in capital allowance claims, a tax credit of £18.3m from the reduction in corporation tax rates, offset by a tax on exceptional items of £7.7m. Debt, interest and tax Whitbread’s underlying interest charge fell £0.2m to £11.4m, reflecting reduced levels of average debt in the period, which fell by £29.3m to £454.9m. Total pre-exceptional interest cost amounted to £19.2m, including a pension charge of £7.8m (2010/11: £5.8m). An underlying tax expense of £47.9m represents an effective tax rate of 27.4% on the underlying profits, which compares with 29.2% last year. “The excess over the statutory tax rate of 26.2% is predominantly driven by the impact of losses arising in overseas subsidiaries and permanently disallowable items,” Whitbread said. Analysts Paul Hickman at Peel Hunt (Buy) said: “Excellent brand management, focused on market leading brands in independently growing markets, has produced performance well above sector norms. Despite the heavy pension liability and the underperforming restaurants, the shares trade close to sector average prospective PER and below the premium they merit.” Geoff Collyer at Deutsche Bank (Buy) said: “The back-end loading of the H&R opening programme, with associated preopening costs, plus rooms taken out for refurbishment and lower Restaurant sales and margins means that, although we saw good margin progression expectations in H1, we expect some of this to be given back in H2.” A Buy note from Citi said: “The stock has performed well post the Q2 trading update and the economy positioning of PI as well as the freehold asset backing and low leverage mean that the group continues to be relative ‘safe haven’ in the sector, in our view. “Based on our FY12 (Feb year-end) forecasts (ebit of £343.3m, PBT of £311.4m, EPS of 129.0p) the stock trades on 12.5x PE and 7.5x EV/ebitda. The wider European hotel sector trades on 15.1x 2011E PE and 7.3x 2011E EV/ebitda. “Although the group has been trading well, we do not think that it will be immune from the economic environment and there remain downside risks to our forecasts. That said, Whitbread has relatively low leverage and a strong property footprint (book value of £1.7bn), which should protect it somewhat.” Jamie Rollo of Morgan Stanley issued an Overweight recommendation for the company. He said: “Whitbread has reported a strong set of interims with PBT of £175m (+15%) versus our £173m estimate and consensus at £165-173m, 18% EPS growth, and 56% dividend growth. “These are impressive results given the weak UK economy. Group margins and return on capital are both up, Costa delivered another stellar performance (EBIT +42%), and Whitbread says it is on track to meet all its expansion targets. “Trading continues to be “variable in a challenging consumer environment”, and the company repeats its Q2 IMS comment that the H1 sales performance is the best guide to underlying trading, i.e. +3% L4Ls currently. “FY forecasts look conservative to us given Whitbread needs 0-6% H2 PBT growth to hit consensus FY forecasts of £310-319m PBT (MSe £317m). We see Whitbread as a relative defensive in the sector, with a high share of the resilient budget hotel segment, an attractive expansion plan, significant property backing, and it is the cheapest hotel stock in developed world stock markets (11x 2012 cal P/E, 6.9x ebitda, 3.0% dividend yield)."