Back in April, I suggested it might be time to for holders of Premier Inn-owner Whitbread (LSE: WTB) to take some profit off the table.
Despite its shares performing well over the last year or so, a rather underwhelming set of full-year figures, coupled with the never-ending uncertainty surrounding Brexit and the sale of the hugely successful Costa coffee chain, made me think there were now better opportunities elsewhere.
Today’s trading update for the first quarter of its financial year has done little to change my mind.
Difficult market conditions
According to the FTSE 100 constituent, “weaker business and leisure confidence has continued” into its new financial year, leading to weaker demand for its rooms (especially in the regional business market).
Total accommodation sales in the UK fell 4.6% on a like-for-like basis. When food and drinks sales are factored in, total sales growth from Whitbread’s UK and International operations was 1.1% lower in the first three months of 2019/20.
CEO Alison Brittain was on the defensive though, stating this was a “resilient performance,” considering the ongoing political and economic uncertainty. She went on to remark the company’s continuing focus on reducing costs had also allowed it to “partially offset another year of high industry cost inflation.”
In addition to this, she was keen to stress Whitbread’s strategy of expanding the Premier Inn brand in Germany is proceeding to plan.
Having already opened hotels in Hamburg and Frankfurt (with the former performing above expectations), the £8bn-cap will now open another two sites this year and continue the process of rebranding the 19 Foremost Hospitality hotels it acquired back in February.
In other news, the company provided an update on its proposal to return £2.5bn to shareholders following the sale of Costa to Coca Cola (unless it’s able to find a better use for the cash).
Having handed over a total of £482m so far via share buybacks, Whitbread now intends to purchase another £2bn worth of its shares, if existing holders approve.
High valuation
As updates go, it’s hardly the stuff of nightmares. But nor, in my view, does it inspire much confidence.
Perhaps unsurprisingly — given that very little has changed with regard to Brexit — Whitbread continues to provide the market with a less-than-enthusiastic outlook, reflecting today that it was “difficult to predict how business confidence and business investment will evolve over the year.”
While plenty of listed companies are in the same boat, I’m still not sure this is adequately reflected in its valuation. A forecast price-to-earnings (P/E) ratio of 20 might take into account Whitbread’s standing as the UK’s largest hotel chain and its aforementioned promising expansion into Germany, but that still looks dear considering the Costa-less firm is now less diversified and arguably far more exposed to a cyclical downturn.
I sincerely doubt its three restaurant chains — Beefeater, Brewers Fayre and Table Table — could take the strain if demand for hotel rooms dwindles.
A yield of 2.3% — very average compared to the cash returns promised by some FTSE 100 firms — won’t appeal to income investors either.
All told, I remain a fan of Whitbread’s hotels but find it hard to get excited about owning its shares. The risk/reward trade-off continues to get less attractive as the months pass.
