Today I’m looking at two similar companies at different stages of development. Should investors buy into an established business or aim to profit from the buoyancy of a fast-growing rival?
My big-cap pick is Premier Inn owner Whitbread (LSE: LON:WTB). This FTSE 100 business has 74,070 rooms in 795 UK hotels.
Growing fast is “super budget” hotel operator easyHotel (LSE: EZH). This AIM-listed firm is applying the budget airline model to hotels, with stripped back prices and lots of optional extras. easyHotel is growing fast, but so far it only has 34 hotels with a total of 3,169 rooms.
Which company do I think is the best buy for new investors today?
Strong growth Revenue at easyHotel rose by 33.7% to £11.3m during the 12 months ended 30 September. The group’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 28.6% to £2.96m.
Most of this growth came from adding new rooms. Nine new hotels were added last year with 907 new rooms — a 40% increase. Encouragingly, occupancy improved from 79.8% to 82.4%.
Rapid growth from a small base means that most of the group’s cash is being swallowed up by hotel openings and rising central costs. Pre-tax profit only rose by 1.4% to £0.87m last year. Earnings per share actually fell by 21% to 0.5p, due to the dilutive effect of a £50m share placing in February.
Bull or bear? Investors who back easyHotel’s business model will say that investment in new hotels today should pay off in future years. That could well be true. The group’s market cap of £129m certainly doesn’t look expensive when measured against its net asset value of £120m.
However, these net assets include £41m of cash, which the company plans to spend on opening more hotels. Investors will need to trust that spending on new developments is being well managed so that profitability starts to improve.
With the stock trading on 50 times 2019 forecast earnings, this situation is still too speculative for me.
My Premier choice In August, Whitbread announced plans to sell Costa Coffee to The Coca-Cola Company (NYSE:KO). When this £3.9bn deal completes, Premier Inn will become the group’s sole focus. What’s interesting about this is that despite the budget hotel chain’s current size, management believe there’s still plenty of room to expand.
In the UK, the company has a “committed pipeline” of new hotels that will add an extra 13,000 rooms to its existing total of 74,000. Beyond this, the company is starting to expand the business in Germany and the Middle East.
Despite this rapid growth, occupancy has remained stable at over 80% and the group’s average room rate has edged higher.
Is Whitbread stock cheap? It’s a little difficult to get a clear picture of Whitbread’s future earnings until the split with Costa Coffee has been completed. But what I do know is that that the Premier Inn UK business generates a return on capital of about 13%. This strong figure shows that the group is generating plenty of cash to help fund its own growth.
I’d like to own Whitbread shares. But to be honest I think they look a bit expensive at the moment, on 22 times forecast earnings and with a yield of just 2%. I’m going to sit tight and wait for a better buying opportunity.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.