Stuart Gordon and Najet El Kassir of Berenberg explain why Whitbread’s two market leading brands provide it with plenty of momentum, as the group gears up to report its full-year results next week.
● Our view in a nutshell: Whitbread has an attractive structural growth profile in both its market-leading brands. In addition, we continue to believe that Costa Express is a hidden gem. While ongoing Brexit fears are likely to cause volatility in the shares, we still see value in the long-term story and remain buyers of the shares. We believe that there is potential for a strong set of fourth quarter numbers, given the high level of room openings last year, while the recent Costa price increase should have maintained lfl growth. We retain our £50 price target.
● Structural growth still attractive: We believe that Whitbread brands offer significant structural growth that is not fully reflected in the share price. In this note we look at Premier Inn, where we demonstrate that while there is a strong focus on lfl growth (rightly so), the overall revenue growth shows that the newer hotels (not included in this data) are performing strongly and maturing faster than anticipated. This means that overall top-line growth for these new hotels is in fact outstripping the pace of openings and bodes well for future structural growth.
● Chance of a good quarter: A couple of factors are likely to influence the full-year results, due on 25 April. The first is the well documented fact that Whitbread had an extra week last year (53-week year). We provide the comparable numbers in this note. The second factor is the prospect for the company to deliver a strong quarter. There was a significant skew in openings in the last quarter of last year, which we understand materially undermined the performance of these rooms. With the process much smoother this year (half the number of rooms opened in Q4), this will be less of a drag and provide a platform for what we believe could be a better than expected performance.
● Costa Express a winner: We continue to believe that Costa Express machines will drive a significant proportion of Costa’s future growth in terms of incremental revenues and profit. If the company continues to expand at the rate of 1,500 machines per annum, then it is feasible that this will drive close to 50% of the incremental growth in Costa; even if the run rate falls back to 1,000 machines it will still mean that Costa Express will generate around a third of incremental revenue growth.
● Valuation: We are broadly in line with consensus in terms of full-year expectations for 2017. For 2018, we are slightly ahead of expectations for adjusted EBIT (1%) but again we are not materially different across the P&L. While we are broadly in line with consensus, we still believe that on valuation Whitbread is trading at a discount when using a sum-of-theparts analysis. We retain our Buy recommendation and £50 price target.