Joining other market titans reporting results today was Premier Inn (and former Costa Coffee) owner Whitbread (LSE: WTB).
Stock in the £9bn-cap had been on a nice run of late, up 22% from July last year before markets opened this morning.
When you consider the level of fear that temporarily gripped investors between then and now, that’s hardly a shabby result for new(ish) owners of the stock. That said, I’d now be inclined to take some profit. Here’s why.
“Soft demand”
Despite the company hailing a “solid financial performance in a challenging environment,” I can’t help but feel rather underwhelmed by today’s figures.
Revenue was just 2.1% higher over 2018/19 at £2.05bn, with underlying pre-tax profit coming in at £438m — a mere 1.2% improvement and helped by a focus on cost control.
But there’s a bigger concern. While total room sales in the UK grew 3.5%, thanks to additional capacity, the company saw “soft demand“, particularly in Q4, with like-for-like accommodation sales declining 0.6%, due to the ongoing farce that is Brexit. More on that in a minute.
On statutory measures, pre-tax profit from continuing operations fell 39.1% to £260m, due in part to £108m of disposal costs relating to the aforementioned sale of its coffee chain to Coca-Cola for £3.9bn at the start of 2019. Today, Whitbread announced its intention to return “up to” £2.5bn of the latter to shareholders.Â
Trouble ahead?
Whitbread’s shares were down well over 2% at the bell. That’s not entirely surprising when you consider the rather uncertain outlook.
That dip in Q4 could also be a sign of things to come, particularly as CEO Alison Brittain was only able to state that it’s “too early to know how business confidence and its impact on the market will evolve” in the new financial year.Â
That would be acceptable if Whitbread’s shares were trading in line with the wider market but they’re not. Stock in the business was valued on 20 times forecast earnings before this morning, with a least some of this valuation surely the result of excitement over the company’s plans to continue expanding into Germany.
Nevertheless, that’s a bit too rich for me given the cyclical sector in which it operates.
There are other reasons for not wanting to jump on board. Returns on capital — a number often used to gauge the quality of a company — fell slightly to 12.2% as a result of the issues surrounding the “timing of new capacity” as well as ongoing investment and the dip in demand in the UK.
That figure certainly isn’t awful but nor is it much to shout about considering the number of businesses out there generating vastly better returns on the money invested by management — something that top fund manager Terry Smith believes is the key to investment outperformance.
Ignoring what investors receive as a result of the sale of Costa, the reduction in the full-year dividend to 99.65p per share (from FY18’s 101.15p per share) also shows that the days of double-digit hikes to the payouts are long gone.Â
Whitbread’s not a bad business by any stretch of the imagination and will surely fare better than many independent hoteliers going forward. But with Brexit still unresolved and the jewel in its crown now disposed of, I think growth-focused Foolish investors could probably do better elsewhere.