Goodbody analysts have set out their view on the prospects for Whitbread, post the divestment of Costa, suggesting that it opens the door for value creation.
The note says:
Following the sale of Costa to Coca-Cola for £3.9bn (16.4x EBITDA), our focus now shifts to the Hotels and Restaurants division. We have always liked the Premier Inn business and believe the sale of Costa leaves Whitbread a much more attractive investment case with better long-term growth prospects both in the UK and internationally. Additionally, the majority of the proceeds are expected to be returned to shareholders, which we think will likely be done by way of a special dividend and/or a share buyback.
H1 Results due on October 23rd
Whitbread will report its interim results next week, and we expect most of the focus will be on the Hotels and Restaurants division. For this division we forecast revenue growth of 7% yoy to £1,128m, and EBIT of £312m, +6% yoy. Given a softer hotel market backdrop and surge in new supply (in London in particular) we forecast London LFL RevPAR of -3% and flat RevPAR in Regional UK. We expect LFL sales growth of +1% in the Restaurants division. Outside of this we hope to get an update on the timeline for completion of the sale of Costa and reiteration of targets provided earlier in the year.
Valuation looks particularly undemanding – Upgrade to BUY
Based on our forecasts the implicit value of the new group is now just 8.7x EV/EBITDA. We believe this is a very undemanding valuation and there is scope for further value creation. Looking at the new group we use a SOTP valuation, placing an 11x multiple on Hotels and 7.5x on the Restaurants division. This yields a price target of £53, representing c.17% upside to current levels. We upgrade to a BUY recommendation.