This U.K. Hotel Group Is Booking It This Year. Why Investors Should Have No Reservations.
As the recovery in international travel continues, and demand in the U.K. stays strong and pricing remains robust, it might be worth checking into the U.K. hotel group Whitbread .
The stock (ticker: WTB.UK) has had a stellar start to the year, climbing 20%—in comparison to the broader FTSE 100’s 4% rise. But it might not be too late for investors to book the hotel and restaurant group because there are potential catalysts for more gains.
Whitbread’s budget Premier Inn chain is showing no signs of a slowdown, with strong sales in the third quarter and an upbeat outlook. It is also poised to gain market share as U.K. hotel supply declines, a trend which the company says will keep pricing strong.
Investors may also be in line for more capital returns, with management set to update shareholders about its full-year results in April.
On the company’s third-quarter sales call in January, Chief Financial Officer Hemant Patel emphasized the company’s “good history” on shareholder returns before the Covid-19 pandemic. He reminded analysts that Whitbread returned 2.5 billion pounds sterling ($3.1 billion) to investors following the sale of Costa Coffee to Coca-Cola in 2019.
Over the longer term, Whitbread’s real growth story may lie in Germany, where it is rapidly expanding the Premier Inn brand. German sales rose 26% in the third quarter from the same period in 2019, on a like-for-like basis.
Premier Inn Germany remains loss-making, but turning a profit isn’t far off. Whitbread recently narrowed expected losses for its German business, to £40 million to £50 million in the full year 2023, ending March 1. The growth is only just getting going. Whitbread opened three hotels in Germany in the third quarter, taking its total to 45, and it has another 36 in the pipeline.
J.P. Morgan analyst Estelle Weingrod says Whitbread’s German business is currently being “overlooked” by investors and could account for more than 10% of group revenue in two to three years. She has a Buy rating on the stock, with a target price of £42, a 33% gain from Thursday’s price.
Whitbread’s core U.K. market provides another reason for optimism. A trading update last month showed U.K. sales growing 27% on a like-for-like basis, compared with the third quarter of 2019. Significantly, management said bookings were encouraging and expected pricing to remain strong, allaying any fears of a demand slowdown.
“Whitbread is, by far, the leader in the U.K. in its segments and should continue to benefit from both a solid market and the fact that supply is structurally positive,” with stand-alone hotels closing and chains gaining market share, Deutsche Bank analyst Andre Juillard says. He has a Buy rating on the stock with a £35.50 target price.
U.K. hotel room supply is down 4% versus prepandemic, the company estimated, as the number of independent hotels has fallen during tough economic times. Management forecasts that labor shortages and cost inflation may accelerate the decline further.
Whitbread’s own rise in costs doesn’t look too bad, with the company seeing a 7% to 8% increase in the full year 2024. Barclays analysts, also rating the stock a Buy, say Whitbread would need 3% to 4% like-for-like sales growth in the U.K. to mitigate that, which it sees as achievable.
The stock is still relatively cheap, despite its strong start to the year. The shares trade at 21.2 times full-year 2024 earnings estimates, cheaper than the sector average of 25.9.
The budget-hotel leader could be a stock well placed to weather a potential recession and come out the other side as an even stronger player in the industry.