Shares in hospitality group Whitbread (WTB) fell to a five-year low after its business review failed to resonate with the market. The firm aims to ‘refocus’ its capital spend and ‘recycle’ more of its freehold estate to raise margins and cash.
More focused approach
In light of significant cost increases, including business rates and NI, the board has come up with a five-year plan. The aim is to increase profits and reduce capex, raising its return on capital employed and generating £2 billion of free cash flow.
First, it will focus capex on the highest-return opportunities to increase pre-tax profit by £110 million by FY31. Next, it intends to move to a fully-integrated food and beverage offering to add a further £100 million of profit.
Fewer freehold properties
To reduce capex, it will reduce its freehold property from 50% to between 30% and 40% of the portfolio. That will mean an annual spend of £250 million at most, representing a £1 billion saving versus the previous plan.
In Germany, where the brand is now profitable, the group aims to generate £65 million of incremental profit by FY31. In total, therefore, profit should rise by £275 million meaning return on capital employed will increase significantly.
Together with cost efficiencies, these measures are expected to generate over £2 billion of free cash flow in five years. ‘This plan will transform Whitbread into a higher-margin, higher-returning pure-play hotel business’, said CEO Dominic Paul.
In fairness to Whitbread, setting out a five-year plan to streamline the business and improve returns is laudable. Premier Inn has a strong market position, but to grow costs money so a lot of thought has gone into this review.
Recycling £1.5 billion of property to reduce ongoing capex and fund future growth is perfectly sensible. Moreover, there is an active market in hotels and hospitality assets and demand is good for now.
Presumably investors are unhappy about the short-term hit to FY27 earnings, which the firm puts at a net £10 million. Also, buybacks have been put on hold as spending is diverted to the existing hotel estate and new openings.
Assuming the group meets its incremental profit target in FY31, adjusted pre-tax earnings would be £758 million. Roughly speaking, that would mean EPS of around 325p putting the shares on an FY31 PE of 7 times. You pays your money, you takes your choice, as they say.
Read the press release here:
https://www.whitbread.co.uk/investors
