Leading analyst Geof Collyer has upgraded Whitbread from Hold to Buy saying that he saw the self-help element of the company’s long term growth story as “fundamentally appealing, providing a significant degree of comfort for our forecasts over the next five years”.
He said: “Whilst we do not at this juncture see any material M&A activity on the horizon for the group, it seems logical that the Board might be tempted to join Accor and IHG in returning capital to shareholders. We see the possibilities extending to as much as 27% of the current equity value over the next four years if the group sticks to its self imposed gearing guidelines. We have raised our target price from 2,710p to 2,920p.”
Collyer said that FY’13E was another strong year for the company with a lot of “self help”.
Her said: “In the year just ended, we are looking for 46% of our projected revenue growth and 56% of the EBITA growth to come from Hotels & Restaurants, driven by 9% space growth in Premier Inn, and 1.9% lfls. For Costa, we are looking for 16% space growth and 5.5% lfls, generating 54% and 43% of revenue and EBITA growth. We expect the CEO to update on his growth milestones during FY’13. If it were us, we would be tempted to wait until the interim results, so that (i) WTB would be halfway through the five-year period of the original milestones and (ii) the difficult Q1 & Q2 comps would be out of the way.
“We expect Whitbread to report £2.05bn of group revenues, up 15.2% yoy on a reported basis. Division-wise, our expectations on reported and lfl growth are more or less in line with what the company has reported for its 50 weeks to 14 February 2013 and we do not expect any surprises over the last two weeks’ trading. The focus for the results could be on profitability and management guidance for FY’14E performance.”
Collyer said that by developing strong rollout programmes for its hotels in UK and its coffee shops both at home and internationally, and by improving operational performance and positioning relative to their competitive sets, Whitbread should be capable of attractive earnings and dividends growth compounding over the medium to long term - and is forecasting four year cagr of 12%-13% for each.
He said: “The group has a relatively conservative balance sheet that could allow for opportunistic acquisitions were they to present themselves, and is broadly living within its cash flows. We see Whitbread as one of our stronger organic growth stories, with probably a more robust business mix than many other stocks in the leisure sector.
“For Costa, we expect revenues of £678mn for FY’13E (up 24% yoy), driven largely by new store openings. Whitbread has been steadily growing the Costa brand, with the Costa Express openings ahead of plans. We would expect the Q&A to focus on progress in China, where lfls have slipped from 29% in Q1’13 to high single digits for Q4’13.”
For FY’13E he expects Whitbread to report an EBITA of £377mn, up 9% yoy.
He said: “However, at the margin levels, this represents a -103bps reduction from last year, as we factor in some cost inflation and the impact of weather on H2 revenues trickling down to profitability (for H1’13, the margin reduction was c. 60bps). Divisional margins are more important - the group one being a mathematical function of growth for the component parts. We are looking for a 32 bps drift-off in Costa and 56 bps drop in H&R, much of which is likely to come from higher rents from the rollout plan. We would expect the company to maintain its view of a 2%-3% inflation for FY’14E.
“This should be partly offset by revenue growth (especially in the hotels segment, with some increasing RevPAR and scale increase) and by cost efficiencies. For FY’14E, we factor in a modest dip of around 7bps in the EBITA margin at the group level, with Costa -17 bps and H&R flat. Our FY’13E EPS works out to 150p, up 11.8% yoy. We would expect a similar increase in the dividends declared - DBE 57p for FY’13E. Maintaining our theme of potential cash backs, the group could improve its payout ratio - though there has been no indication on this from the board.”
