Whitbread (LON:WTB) continues to show that the strong get stronger with Premier Inn, much the largest UK hotel chain, materially outperforming the market throughout H1 to August and to date (by 14% in the seven weeks to 14 October). Notwithstanding seasonality, accentuated by the staycation boon, management expects leisure demand to remain buoyant, with tradespeople business resilient and office-based custom recovering, thereby a potential return of UK like-for-like RevPAR to pre-pandemic levels ‘at some point in 2022’. Robust, asset-backed finances (£2.1bn liquidity) give ample scope to capitalise on structural opportunities, enhanced by COVID-19 fallout, in the highest growth segment of the hotel market, both domestically and in Germany, where management is confident of replicating its UK success.
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Business description
Whitbread owns and operates Premier Inn, one of the largest budget branded hotel chains in the world. It is a clear leader in the UK with c 81,000 rooms and has a growing presence in Germany (c 5,000 rooms). Its restaurant brands, primarily on joint sites with Premier Inn, include Beefeater and Brewers Fayre.
Bull
- Strong position in a long-term growth market (budget hotels) with significant opportunity to repeat UK success in Germany.
- Benign environment post COVID-19: pent-up demand, reduced competition and enhanced availability of sites at lower prices and on more flexible terms.
- Robust, asset-backed balance sheet (available liquidity of c £2.1bn at August 2021).
Bear
- Threat of continuing COVID-19 restrictions.
- Macroeconomic uncertainties and operating challenges, mitigated by retention of good liquidity, new three-year £100m efficiency programme and scale (eg buying power and staff career opportunities).
- Execution risk in terms of planned expansion.
H1: Post-lockdown surprise
As only essential business was allowed up to 17 May (the bulk of Whitbread’s Q1), the pace of recovery to end August from almost a standing start is impressive, with Q2 UK accommodation sales (London apart) matching those of the same period of 2019 despite continued COVID-19 restrictions. While the staycation boon and VAT reduction were exceptional factors, Premier Inn’s brand strength, scale, distribution and value offering allowed double-digit pp outperformance of the midscale and economy sector in Q2. Central London was subdued, given weak international demand, but accounts for only 7% of rooms. In Germany (2% of H122 sales), severe restrictions throughout H1 (occupancy 32%) preclude detailed assessment other than recognition of a recovering market (60%+ occupancy in August).
Germany: Aiming to be number one
Whitbread confirms good progress in its goal to be the leading budget operator in Germany, a market potentially even more attractive than the UK as 40% larger, with greater regional spread and highly fragmented (independents 72% share vs 48% in the UK). Its open and committed pipeline of c 14,000 rooms, largely accrued during the pandemic, is already over half that of leader Ibis and on track for 60,000 rooms, which may understate as it’only 6% market share (Premier Inn has 11% in the UK).
Valuation: Attractive
With FY22 disrupted by COVID-19, pre-pandemic FY20 and pre-IFRS 16 numbers give a better guide to a likely valuation. £567m EBITDA on net cash of £60m (August 2021; excluding leases) suggests an EV/EBITDA of 11.6x, reflecting Whitbread’s clear long-term growth potential (average of 9.3x for European peers on similar basis).