Wyn Ellis at Numis has issued a positive note on Whitbread after an analysts’ visit last week to the hub in St Martin’s Lane, London – the first to open, but already there’s a pipeline of 13 to come. His conclusion:
“It is early, but initial trading at St. Martin’s Lane has been encouraging and we believe that Whitbread may have hit upon another winning formula. We are increasing our price target to £56.00, from £51.50, and our recommendation remains ADD.”
As we know, Whitbread has placed considerable importance on the development of hub to its hotel growth in the next few years – it is expected to have 3,000 of the 75,000 Premier Inn rooms targeted for 2018.
In further support of this view, the note cites:
Premier Inn growth: structural change remains under way in the UK hotel market as budget operators take market share from under-invested independent operators (still about.50% of the market). Premier Inn has accelerated development and can continue to expand without any dilution to the mid-teens returns that it is currently generating.
Management assume that the total stock of UK hotel rooms stays flat at c.682,000 rooms over the next few years but that Premier Inn’s share increases from 7.6% to 11% (branded budget hotels from 21% in 2012 to 28% in 2018). Numis sees this as very achievable. London is a key focus growth area and hub by Premier Inn is an important part of the growth strategy.
Positive regional market outlook: Investors can take encouragement from the recently published UK hotels outlook by PwC which forecasts 5% RevPAR growth in calendar 2015 in London. The Provinces are now benefiting from an improving economy and have set a “blazing pace” for RevPAR recovery. PwC forecasts 6% RevPAR growth in the Provinces in 2015. Numis currently forecasts 3.5% RevPAR growth in FY16 (Feb) at Premier Inn.
Costa Coffee: WTB has been an excellent parent, facilitating its very rapid, profitable development. Over the last 5 years the UK coffee market has growth at an estimated CAGR of c.8%, whilst Costa has grown sales at a CAGR of over 20% and reported EBIT at a CAGR of about 25%. Numis believes that there are still promising growth prospects in the UK, but if Costa can demonstrate that the brand has legs in international markets, then the earnings growth potential over the medium term should be transformational.