The stock market was taken aback by the results from Whitbread for the year to March 3. After weeks of news of low growth and high inflation, it was a shock to hear a story of relentless optimism from a company in the budget hotels business. But is it sustainable?
Statutory revenues were £1.7 billion, 189 per cent up on last year’s £589.4 million and not that far short of the £2.07 billion of two years ago. Pre-tax profit was £58.2 million, compared with a £1 billion loss a year ago and a £280 million profit in 2020. However, the latest profit included £126.5 million of Covid-related UK government support, albeit down from £260.3 million a year ago. Similar German support was £44.3 million compared with £11.8 million the year before.
The profit, therefore, was not entirely unaided, but the numbers are clearly heading in the right direction. According to Alison Brittain, the chief executive: “Our operational performance throughout the year was outstanding. The summer, in particular, saw very high levels of demand in our hotels, with many continuously at full occupancy.”
Whitbread has transformed itself in the past two decades, from a brewer dating back to the 18th century, then a business that struck out into coffee shops and other ventures and now streamlined into the operator of Premier Inn budget hotels with pub restaurant brands such as Beefeater, Thyme and Cookhouse + Pub. Apart from a small joint venture in the Middle East, it trades entirely in Britain and Germany. Demand is split evenly between business and leisure customers.
Brittain, 57, who has said that she will step down in the next year or so, sensibly declines to look beyond a buoyant start to the new financial year. But she believes there is more than the obvious element of recovery in the reported figures, pointing out that they were 29 per cent above pre-Covid levels on a like-for-like basis.
The company may be a sweet spot between leisure and business traffic reviving in the UK and Germany and people starting to look to Mediterranean and American holidays and sales trips around the Continent. Indeed, it is already detecting foreign holidaymakers booking British hotels for later in the year. Meanwhile, the financial squeeze is taking a small but significant number of independently owned hotels out of the market.
German Premier Inns are still lossmaking because the country was slower out of Covid restrictions, but for that reason Brittain sees that territory as the big growth engine, with its 37 hotels an important platform for future expansion.
She is also extending the Premier brand down and upmarket. While Zip hotels offer a small room, a simple stay and charge only £19 a night or so, Hub fluffs up the pillows a little and throws in a smart TV. Premier is also following the Hyatt formula of devoting whole floors to quiet rooms with add-ons. Restaurant sales, 25 per cent of total sales and as yet a tiny proportion of profit, are lagging but should catch up. In the longer term, Brittain says Whitbread is looking to take the Premier Inn formula around Europe.
As a sign of confidence, Whitbread has resumed dividends a year earlier than expected. It is a token 34.7p a share, for a yield of only 1.3 per cent, but shareholders can look forward to increases in future. German losses may double to £60 million to £70 million this year, thanks to the costs of further expansion, but Morgan Stanley is forecasting £210 million group profits for this year and a price-earnings ratio of 19. That looks value for money in what will still be a volatile climate.
ADVICE Buy
WHY A well-managed way to benefit from a return to post-Covid normality
Inchcape
Inchcape is another company that seems to have defied the prevailing economic weather, in its case with an upbeat trading statement and the expectation of a 25 per cent profits rise to at least £300 million for 2022.
Like Whitbread, there is a strong post-Covid catch-up flavour to the multinational car dealer’s report for the first quarter of 2022, but Inchcape is driven not by a resurgence of demand but by the difficulty manufacturers have been having amid problems in their supply chains and a continuing flow of sick notes. While new car volumes are still 20 per cent to 25 per cent below 2019 levels, orders remain at record levels.
Inchcape has shed its once-sprawling ragbag of colonial trading entities to slim down into the motor business, with a few JCB diggers on the side. While it handles Toyota, Volvo and Subaru, most of its marques are of the BMW, Mercedes, Jaguar and Porsche ilk.
Duncan Tait, 56, the chief executive, argues that “the strength of our business model and financial position means Inchcape is well placed to grow profits and generate cash, and we are confident in the medium-term outlook”. For the three months to the end of March, revenue was 6 per cent up on a year ago, indeed by 9 per cent at constant exchange rates and 13 per cent excluding acquisitions.
Continuing supply hold-ups will continue well into 2023, boosting profits over the medium term. Inchcape also will be able to feed off acquisitions such as Ditec in Chile. And that is without allowing for the growth of electric and autonomous vehicles.
The company has extricated itself from Russia with a £63 million management buyout. That is payable over five years, but there is no guarantee that President Putin will let the money leave the country. There will be other problems, not least that governments might try to restrict car use for environmental and other reasons, but Inchcape’s affluent customers should be able to shrug that off. Jefferies sees the shares trading on 10.9 times earnings and a 3.7 per cent yield. That does not appear to discount the potential.
ADVICE Buy
WHY Company is well placed to benefit from continuing strong demand for cars
