Whitbread's lacklustre trading update fails to instil confidence

Profit is expected to be lower following increased investment expenditure.

  • Shares are down in early morning trading following uninspiring trading update and another global market slump
  • While revenues and underlying pre-tax profit was up, profitability in the near-term is likely to be lower than recent years which is a concern given the geopolitical climate
  • We maintain a cautious stance on the shares continuing with a medium risk ‘hold’ recommendation

The much anticipated half-year trading update has failed to inspire investors as the shares opened lower by a few percentage points. This is probably more down to the general selloff in the market this morning on the back of weak overnight Asian markets rather than any specific disappointment in Whitbread’s results.

It was much anticipated because of the update investors were expecting following the agreement to sell the Costa business to Coca-Cola for £3.9bn and the plans that management had with the proceeds. As expected, they have stated that most of the proceeds will be returned to shareholders but have not stated the exact amount, timing and method - which is what investors really wanted to find out; this is pending further discussion with stakeholders including creditors and pension fund and shareholders.

With the Costa business now listed under discontinued operations, Whitbread is now predominantly a hotel business and its performance during the first-half did not stray from expectations too much. Revenues were up by 2.6% to £1,079m while the underlying profits before tax grew by the same rate to £270m. The sales growth in the UK was driven chiefly by increased capacity with a network now spanning 74,000 rooms with a pipeline of 13,000 rooms in the UK and 6,000 rooms in Germany. There was some disappointment over the revenue per available room which decreased by 0.9% to £52.97 while the occupancy rate dropped to 81.1% from 81.8%, explained by weak consumer demand over the summer months possibly due to consumer caution in the face of political and economic uncertainty with inflationary pressures in the consumer sector.

However, management have got a strong grip on costs which were limited, while growth opportunities remain in the UK and internationally for the Premier Inns hotel chain where they plan on opening 4,000-4,500 rooms during 2019. As a result of the increased investment expenditure they have warned that near term profitability will be lower than recent years.

While cash flows remains good and management keep a tight control on costs, the near term outlook for us is uncertain given the geopolitical environment and the state of consumer confidence. Prior to these results we held a cautious stance on the shares which we continue to do so as these results have not done too much to sway our view in either direction. We continue with our medium risk ‘hold’ recommendation for investors seeking a balanced return and willing to accept a medium level of risk.


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