Whitbread slides on worries about UK and cost of expanding abroad
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Version 0 of 1. Costa Coffee and Premier Inn owner Whitbread has come under pressure as the City frets about the outlook for the company in its key UK market and the cost of expanding overseas. Morgan Stanley raised its target price from £52 to £58 but kept its equal weight rating on the basis the business will need to invest heavily to grow internationally. Analyst Jamie Rollo said: Whitbread’s success in the UK is well established and well understood, and it is also where it makes 100% of its earnings before interest and tax. At some point the UK will slow, and success abroad will become more important. To date, the company is on track for its UK targets but behind for International, and we assess the potential upside if International succeeds. However, due to its overseas franchised model, low critical mass in equity markets, and the sheer scale and capital behind the UK businesses, we conclude neither Costa nor Premier Inn International are likely to be materially profitable, and that Whitbread needs to invest more capital, particularly in Europe. This may mean higher ramp-up losses, but the longer-term prize suggests this is a strategy worth pursuing. Panmure Gordon was more negative, moving its recommendation from hold to sell. Analyst Anna Barnfather said: Rising debt levels and falling returns means Whitbread is no longer a safe haven. We believe now is the time to take profits and downgrade our recommendation to sell. Whitbread has done well, carried higher by UK consumer recovery, the boom in coffee consumption and execution of its roll out plans. However we see cracks appearing with a steep step up in competition and rising development costs across all three businesses. Furthermore, there is limited visibility on overseas profitability with on-going challenges to international expansion. Whitbread’s capital expenditure is rising dramatically and will exceed cash generation over the next few years – taking net debt higher and dragging returns lower. The stock trades on 11.3 times enterprise value/EBITDA for 2018, when the hotel up cycle will be in its 9th year with inflationary cost pressures mounting: the risks are simply too high to justify the current valuation. Whitbread shares are currently down 125p at £51.80 in a falling market. |