Leading sector analyst Geof Collyer has reiterated his Buy recommendation for Whitbread following news of its new growth milestones, saying he expects earnings per share and dividend growth to continue for another five years.
At its full-year results on Tuesday, Whitbread saw total revenue exceed £2bn as it announced plans to double system sales at Costa to £2bn by 2018 and increase the number of rooms at Premier Inn by 45% to 75,000 by that year.
Collyer, of Deutsche Bank, said: “The group’s milestones are so named because we presume that the management expects them to be not just achieved but passed.
“[Whitbread] has just delivered CAGR of 12% EPS and 10% DIV growth for the past five years.
“We are forecasting CAGR of 12-13% for EPS and dividend for the next four years, so the new targets would probably extend this out to five. We see the risk to this range on the upside from (i) maturity of the Premier Inn portfolio, and (ii) the expanding horizons for Costa.”
He added: “The group is focusing on cash flows of the business and return on capital. We are forecasting free cash flow pre discretionary capex and dividends of c. £300m pa and rising off an equity base of $4.5bn, so there is a running FCF yield of nearly 7%.
“We don’t think that the group has ruled out the prospect of share buybacks at some stage. Our note last week suggested that WTB could retire over 20% of group equity over the next four years. It would be icing on the cake, but not essential to our buy case.”
In terms of Premier Inn, Collyer said: “Apart from the portfolio maturity issue, a key facet of the growth story is that the group is mounting something of a land-grab in the more prosperous parts of UK; 80% of new rooms will be in southern England with 51% of the 80% in Greater London.
“Within M25, RevPAR is double that of the group’s UK regions, and the growth of London over the next five years will move the region’s share of group rooms from 16% to 26%. This should provide a healthy structural uplift in RevPAR along with the rollout growth. Both of these underpin a better performance than that which we forecast for Accor (Sell, EUR25.10), where this kind of mix issue has a negative RevPAR impact in the coming years.
“Premier Inn also developing as a strong digital online business with 83% of bookings coming through online portals, with mobile now 29% of recorded clicks, double the prior year figure.”
On Costa, he pointed out that Whitbread has 256 shops in China in 28 different cities, with a medium target of 500 and the possibility of emulating Starbucks’ target of 1,500.
“Following Thailand and Cambodia, Costa is likely to add Indonesia, Malaysia and Singapore (where Premier Inn International is opening) in South East Asia. In Europe, France is the first of what we would expect to be a number of new markets that Costa will target. [Whitbread] believes that there could be scope for hundreds of Costa stores in France if the trial of six new shops proves successful.”
