Premier Inn owner Whitbread PLC (LSE:WTB) was under the spotlight for a couple of analysts after its shares fell around 10% since a trading update in mid-January that revealed improved UK revenues per available room (revpar).
Although recent weekly industry data remains volatile and headlines abound over the possible impact of the autumn Budget, analysts at Shore Capital said they "suspect that underlying trends are broadly unchanged" and took the opportunity to highlight what they see as an undervalued share.
Whitbread’s market-leading UK business is valued at under seven (and "arguably six") times underlying profit (EBITDA), a valuation metric that is "low by historic standards" with a previous premium to the broader market having evaporated.
Given management's five-year plan, which could see earnings per share build beyond 300p (with little help needed from RevPAR), the market appears to have either given up on the investment case or expects a much weaker outcome for the UK hotel market over the next year.
In the final quarter of the FTSE 100 group's financial year, Shore Cap kept its pre-tax profit estimate of £492 million unchanged, predicated on a UK revpar decline of 1.5%, including flat in Q4.
"Having been flat in the early part of the quarter, market conditions unchanged and only six additional weeks trading in the early part of the calendar year, we see little to play for in current year forecasts."
What the analysts do see worth playing for is some £500 million "headroom" to Whitbread's leverage threshold and the five-year plan targeting generating more than £2 billion for dividends, share buybacks and investments.
Shore Cap's current estimates set this at £2.2 billion including around £1 billion in buybacks.
"Given assumptions of building profitability and front loading of investment, shareholder returns unsurprisingly would be expected to be back-end weighted.
"However, given the share price, should management bring forward part of this eventual shareholder return?"
The analysts added that although they appreciate a desire to maintain headroom, "a £100-200 million buyback at the prelims in May would be a positive, adding just 0.1-0.2x to the leverage ratio and up to 4% of the market cap".
Elsewhere, Citi also mentioned that Whitbread is its "overall top pick" in the European leisure sector.