A takeover approach would be the fast route for Whitbread investors to bag a better return, but there’s also a more studied path to push the stock higher. Take more share of the UK hotel market; hit pay-dirt in Germany and return more surplus cash to shareholders. That is ground that the Premier Inn owner can cover in less than three years.
Exploiting the acute imbalance between demand, which has ricocheted post-pandemic, and restricted supply, has sent rates for Premier Inn’s UK rooms a way ahead of the pre-pandemic level. Together with an increase in occupancy, that pushed revenue per available room last year to £59.45, from £46.91 the year before Covid emptied hotels.
The spoils from the vast UK estate easily offset wider pre-tax losses of £50 million in Germany, a nascent market into which Whitbread is rapidly expanding. At a group level, adjusted pre-tax profit came in ahead of market expectations, at £413 million, back from a loss of £16 million last year.
The strength of recovery in the home market has two crucial benefits. One, it has strengthened the balance sheet further, with net cash rising to £171 million, even after capital expenditure more than doubled. Factor in lease liabilities and net debt stands at 2.7 times cash from operations, a way below a target ceiling of 3.7.
Two, there is ample firepower to continue funding the rollout of Premier Inn across Germany. Almost 3,200 more rooms were added last year, with another 1,000 to 1,500 planned for next year. The number of rooms in the UK is also set to expand. Whitbread should be able to more than cover the cost of the £400 million to £450 million capital expenditure this year through internal cash generation alone, Shore Capital thinks. Cash generated by the business is coming in just shy of £1 billion, about £300 million higher than last year.
That has also left room for more generous shareholder returns, with a final dividend of 49.8p a share considerably ahead of analyst forecasts and £300 million in share buybacks planned. The strength of cash generation and the balance sheet means there is room to return about £1 billion to shareholders, analysts at Shore Capital reckon. With profits now ahead of pre-Covid levels, shareholders might wonder where the next catalyst will come from for the shares. True, the pace at which revenue per available room (revpar) is growing can’t continue over the medium term and cost inflation is expected to remain elevated at between 7 and 8 per cent over the current financial year.
But Premier Inn only needs to push forward its revpar by between three and four percentage points to offset inflation, Shore Capital calculates, with new rooms and planned cost savings doing the rest.
The next inflection point comes if the German business can achieve narrower losses this financial year and become profitable in 2025. Losses associated with that business have inflated the earnings multiple attached to Whitbread’s shares. But strip out the roughly £1 billion earmarked for investment in the German business and the losses accumulated in that market and the price/earnings multiple falls from 21 to about 16, Shore calculates.
An undemanding multiple is just one reason that Whitbread could be picked out by private equity bidders. A vast property estate, 54 per cent of which is freehold, also presents the opportunity for sale and leasebacks for any suitor looking to juice up returns. So too, does a balance sheet unburdened by debt, at least sans leases. But there is enough impetus to push the share price higher, without a takeover bid materialising.
ADVICE Buy
WHY Takeover potential and a move towards profitability in Germany couold puish the shares higher
Travis Perkins
Sacrificing present-day profit for potential future gain is a far less palatable trade-off than it was just 18 months ago. That is one reason to explain the decline in Travis Perkins shares, down just over 40 per cent since the start of last year.
The building merchant is pursuing an ambitious and costly expansion strategy of its Toolstation business across the UK and into the European continent, rolling out branches in Belgium, the Netherlands and France. The hope is to eventually build revenue to about £2 billion across both the UK and Europe, a lofty target against the £775 million generated last year.
The problem is, the buildout comes at a time when a slump in the housebuilding market, roughly 20 per cent of group sales, and painful slowdown in consumer spending has dragged sales volumes into negative territory. Over the first three months of this year sales volumes across the group, which also operates a general merchanting business, were down just over 10 per cent and up only 1 per cent for Toolstation despite the business’s increased footprint. Not even price inflation that edged towards double digits could offset weaker demand, pushing like-for-like revenues down 2.9 per cent.
Capital expenditure has been curtailed this year, at £100 million against an annual medium-term budget of £125 million. But profits are still expected to be lower, with Shore Capital forecasting an adjusted pre-tax profit of £231 million, from £245 million last year.
The question is whether investors have the appetite to stomach an even vaguer outlook for profits from the Toolstation business. It will take another three to four years to bring the adjusted operating margin for Toolstation UK towards par with the merchanting business, at about 7 per cent. There is no such target for the European business to be brought into line, where profitability will depend on the pace at which new branches are opened. Adjusted operating losses for the European Toolstation business came in at £30 million last year, the result of branch investment and lower sales volumes, with a similar outturn expected this year. It is unclear when this costly expansion will deliver real reward.
ADVICE Avoid
WHY Weaker sales and high expansion cost may hit profit
