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Whitbread kicks off £500mln share buyback after Costa sale as it issues cautious outlook

Last updated: 09:30 17 Jan 2019 GMT, First published: 07:43 17 Jan 2019 GMT

Whitbread
Whitbread is focused on expanding its Premier Inn hotel chain

Whitbread plc (LON:WTB) has kicked off a £500mln share buyback programme, using some of the proceeds of its £3.9bn sale of Costa coffee to Coca-Cola Co. (NYSE:KO).

The company, which is now focusing on its Premier Inn hotel business after completing the disposal of Costa earlier this month, made the announcement as it reported a 2.4% increase in total sales for the third quarter ended November 29.

READ: Whitbread shareholders await 'significant' payout from Costa Coffee disposal

UK sales grew 2.5% in the period with accommodation sales up 3.5% and food and beverage sales up 0.5%.

However, on a like-for-like basis, UK sales dipped 0.6% with accommodation sales down 0.2% and food and beverage down 1.5%.

Weaker confidence hits accommodation sales in regional areas

Whitbread said the decline in UK like-for-like accommodation sales reflected a recent weakness in the regional market due to lower consumer and business confidence, offsetting a strong demand in Central London.

The timing of hotel openings also had an impact on the quarterly like-for-like performance. The group has opened more than 2,000 rooms in the UK this financial year and plans to open another 3,000-4,000 rooms in the next financial year ending in February 2020.

German losses and weaker UK revenue expected in 2020

In Germany, where sales fell 3.5% in the quarter, Whitbread said loses are expected to increase to about £12mln in 2020 as it expands its hotel estate by 2,500 rooms.

As part of its cost-cutting plan, the firm expects to deliver savings of £40mln to £50mln in 2020 but this won’t be enough to offset cost increases of about £70mln.

The company also said it remains cautious about the UK economy given the uncertainty surrounding Brexit and inflationary pressures.  It expects weaker UK revenue per available room in 2020, particularly in regional areas.

There will also be some “short-term operational dis-synergies” following the sale of Costa, the company warned.

Flat profit estimated in 2020

“Although we are confident in our ability to create value from ongoing investment in the UK and increasing investment in international growth, in this environment we expect underlying profit before tax in FY20 to be consistent with this year,” said chief executive Alison Brittain.

Whitbread said that it will provide further details on its plan to return a “significant majority” of the cash proceeds of the Costa disposal to shareholders at its capital markets day on February 13. 

Shares fell 1.5% to 4,699p in morning trading as analysts had been hoping for an increase in 2020 profits. 

Russ Mould, investment director at AJ Bell, said the flat profit raises whether "Whitbread shareholders will really want to stick around once they get their share of the proceeds from the sale of Costa".

"They are left with a business that is lacking earnings momentum, at least in the short term," he said.

“On the one hand Premier Inn is a strong brand and there is certainly demand for slightly upmarket affordable accommodation. On the other, it operates in an industry that continues to expand despite there already being significant supply."

Growth at Premier Inn 'not great', says analyst

George Salmon, equity analyst at Hargreaves Lansdown, said the sale of Costa means Whitbread can focus entirely on Premier Inn but unfortunately growth at the hotel business "isn’t great just now" and improving that trend "won’t be easy".

"Business and social travel tends to fluctuate with the fortunes of the wider economy, and with uncertainty looming over the UK, it’s no surprise customers are tightening the purse strings," he said. 

"However, there is some good news for investors. Expansion in Germany is gaining pace, and the £500m buyback probably only serves as a starter for ten.

"Even after making contributions to reduce debt and the pension deficit, Whitbread will still have a significant sum burning a hole in its pocket. Investors can expect another windfall to be announced next month.”

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