Is it worth buying Whitbread shares right now?

Times

a day ago

It is only a matter of time before Whitbread changes its name to Premier Inn. Ever since it started the Travel Inn chain in 1987, augmented by Premier Lodge in 2004, hotels have gradually been elbowing other activities — brewing, coffee shops, pubs — out of the nest. It has reached the point where food and beverage revenues and profits are no longer broken out in the annual report's segmental analysis.
Instead, the two named divisions are Premier Inn UK & Ireland, and Germany. The restaurants, under the names Beefeater, Brewers Fayre and others, are either being sold or turned into Premier Inn rooms. One or two particularly profitable outposts may linger, but even they will soon surely not be worth the management time to monitor them.
So the group is changing before our eyes, and is heading towards becoming a UK and Europe-wide budget hotel chain. Much hard work has gone into adapting the Premier Inn formula for Germany since the first one opened in Frankfurt nine years ago.
That will inspire a rollout to other countries. A toe has already been dipped in the water in Austria, and for some years there has been a Middle East joint venture with Emirates Group. The German experience will provide a natural platform for expanding to Scandinavia and other northern European territories. Dominic Paul, the chief executive, told The Times last month: 'We are proving Premier Inn can grow and that, once the right model is in place, we can grow quite quickly. We're getting to a point where the German business is learning from the UK business and the UK is learning from Germany.'
It is still a work in progress, and the transition was well illustrated by the results for the year to the end of February. Total revenue and adjusted earnings before interest, tax, depreciation and amortisation actually edged down a touch, to £2.9 billion in the UK and £1 billion in Germany. UK business revenues fell 3 per cent to £2.7 billion, while revenues in Germany rose £41 million or 21 per cent to £231 million. UK adjusted pretax profit fell from £588 million to £507 million thanks to cost inflation and lower interest income. But cost savings in Germany cut the loss there from £36 million to £11 million, so it is going in the right direction and in 2025 profits should begin to flow.
Paul seems to have imbibed the Peter Drucker idea of management by objectives. The latest Whitbread annual report is replete with targets, led by the three-pronged strategy to grow and innovate in the UK; focus on strengths to grow in Germany; and enhance capabilities to support long-term growth. There is, of course, a five-year plan, to recycle at least £1 billion of its most mature property, to generate at least £300 million of incremental profit, distribute more than £2 billion in share buy-backs and dividends, and expand the estate from 86,000 to 98,000 rooms, all by 2030. Some rooms will be converted from existing attached restaurants, and 5,000 are earmarked for Germany.
As the group is deep into hospitality, it has been held back by sluggish economic growth in Germany and the UK, and the effects of last October's UK budget, which increased national insurance contributions and the minimum wage. That was reflected in the share price, which tumbled from £33 to £23. Since April, however, it has climbed nearly all the way back up, reaching £32 on the back of the general stock market recovery and the prospect of falling interest rates. The planned £250 million share buyback did no harm, either.
Last month's first-quarter figures sent the analysts back to their spreadsheets, as total revenue and revenue per available room both fell by 2 per cent. The UK outside London was the laggard, while Germany steamed ahead by 16 per cent.
None of that phased Paul, who preferred to point to the five-year plan. 'In the UK, we continue to outperform against a challenging market backdrop,' he said.
Clearly the real returns are not going to break through until the economic background improves.
Peel Hunt rates the shares a buy, saying: 'Whitbread continues to create value: room openings are accelerating, skewed to higher-priced London, business market penetration is growing and independent competitors are struggling.' They see earnings per share bursting from 193.4p to 234.3p by February 2028, for a prospective 13.2 price-earnings ratio and a 3.8 per cent dividend.
ADVICE HoldWHY A sound long-term expansion prospect at the end of the road