Whitbread plc (LON:WTB) shares gained on Friday after Barclays upgraded its recommendation on the stock, saying the Premier Inn owner is now its preferred hotel pick.
The company announced on Thursday that it had completed the sale of its Costa café chain to Coca-Cola Co. (NYSE:KO), leaving it to focus on its plan to expand its hotel business in the UK and Germany.
Whitbread plans to return some of the proceeds of the sale to shareholders through a £500mln share buyback programme.
READ: Whitbread receives clearance from Chinese regulator for Costa sale to Coca-Cola
Following news the Costa deal has been completed, Barclays upgraded its rating on Whitbread to ‘overweight’ from ‘equal weight’ and raised its target price to 5,200p from 5,000p.
"Clearly there are significant risks surrounding the macro outlook and consequently the group’s earnings profile," Barclays said.
"Today we cut our underlying forecasts by 4% on lower revenue per available room (RevPAR) to reflect this (offset in 2019/20 by the timing of cash returns). However, we believe the risk/reward is now skewed to the upside."
Brexit risks
Barclays said a Brexit-induced recession would result in a 6% downgrade to earnings per share (EPS) and a valuation of 3,540p.
If the Brexit outcome is not as bad as feared and the German expansion works, Barclays expects an upgrade to earnings and valuation.
“Our upside case with +3% RevPAR in 2019/20 and some credit for Germany working suggests 18% EPS upside and a £70 share price (+51%).”
“We also provide a blue sky scenario in which the share price could double with a strong UK recovery, leverage of 3.5x and a stronger performance in Germany.”
Expectations for Whitbread CMD
Whitbread is holding its capital markets day on February 13 and Barclays expects the group will announce a tender offer for £2.5bn, new cost cuts, an update on its plans in Germany and a capital structure target with potential £1bn firepower for acquisitions.
"While we do not expect any game-changing announcement on the property strategy, we highlight a potential £59 share price with an operating company/property company deal," the bank said.
"We view this as underpinning the valuation with Whitbread now more vulnerable following the Costa sale and with activists on the register.
"Shares are likely to be supported by the £500mln share buyback and the fact that 35% of the market cap is effectively cash.
In mid-morning trading, shares rose 1.9% to 4,670p.