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Robert Stephens discusses why Whitbread may offer investment potential despite facing challenging trading conditions.
The recent interim results from Whitbread (LON:WTB) highlight the difficult market conditions it currently faces. The Premier Inn owner reported a 0.1% decline in adjusted revenue, with weak business confidence weighing on its performance.
However, plans to upsell premium rooms to its customers and an ambitious international growth programme could boost the company’s financial performance. It is also seeking to reduce costs and improve the customer experience in order to enhance its competitive position, which could catalyse its stock price.
The company successfully trialled ‘Premier Plus’ rooms in two hotels in the first half of the year. Customer feedback was positive, and has prompted it to develop a pipeline of 2,000 higher-priced rooms over the next year. This could broaden Whitbread’s appeal to a wider range of customers, as well as enhance its margins.
Following the sale of Costa, the company is now ramping-up investment in its international growth plans. In Germany, its pipeline of new hotel rooms has grown by 25% to 7,280 in the last year. This could enable it to capitalise on a highly fragmented German hotel industry, where three-quarters of the market consists of small independent operators.
Its budget offering has proved popular in Germany, where branded value-focused hotels have a market share of just 8%. In comparison, the UK branded budget hotel market accounts for 27% of the overall industry. This suggests there are opportunities for Whitbread’s vertically-integrated business model to grow rapidly.
In addition, international growth diversifies the company’s operations and makes it less reliant on the UK during an uncertain political and economic period.
Whitbread is aiming to generate cost savings of £220 million over the next three years. This could help it to offset potential weakness in the prospects for the UK economy.
Furthermore, UK business and consumer confidence is forecast to improve in the next year. This could alleviate recent pressure on demand for the company’s offering, while its plans to improve its technology infrastructure may boost its competitive advantage.
For example, the business is making changes to its customer booking process and increasing its website investment to provide a more seamless customer experience. This could maintain its industry-leading direct booking rate of 98%, which in turn may strengthen the company’s competitive position.
Trading on a price-to-earnings ratio of 21.4, Whitbread is not a cheap stock. However, it is forecast to grow its earnings by 25% in the current year, followed by further growth of 19% next year. This could catalyse investor sentiment and lead to improving share price performance.
Short-term risks from a slowing UK economy may weigh on the company’s prospects in future months. However, with a sound long-term growth strategy that focuses on developing its international exposure, becoming more efficient and increasing margins through a premium offer, Whitbread’s investment appeal appears to be high.
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