Leading analyst Jamie Rollo, from Morgan Stanley, gives his thoughts on what the weakening trading environment means for Whitbread and what its Q1 trading update could show later this month
Recent data for the leisure and hotel industry, from the like of the Coffer Peach Tracker, BRC, and Morgan Stanley Research has shown a deterioration in footfall in the high street, pubs and hotels, with Whitbread Group’s like-for-like (lfl) sales tracking the decline.
“While some of this is due to the poor weather, the trend has been getting worse for some time, and we expect Whitbread to report its weakest quarter since the 2009 downturn with a 1.5% lfl sales decline in Q1’19 (covering March to May),” said Rollo.
“The company should still generate c.4% total sales growth due to the benefit of expansion, and this plus its efficiency programme should limit margin deterioration, but we still see modest downside risk to forecasts.
“Meanwhile, the shares have been very steady since its FY18 results, despite the company’s plan to demerge Costa, rumours the company has been approached by private equity firms (Press Association, 22 May), and JAB’s acquisition of Pret A Manger for a healthy 16x 2016 EBITDA.
“We think the shares are fairly valued given they trade at our £42 SOTP, but value may continue to leak if the environment remains tough, and a demerger in of itself may be insufficient to turn Costa around.
“The company deserves credit for its efficiency programme, which has limited bigger downgrades, but we question how bad things could get in the next downturn if the company is seeing declining lfl sales now in a market with high employment and reasonable GDP growth, and it might have exhausted its margin cushion with the current efficiency programme,” he said.