Premier Inn to be steady but cautious in turbulent UK
Premier Inn to be steady but cautious in turbulent UK
17 JANUARY 2019 9:53 AM

Whitbread PLC executives say efficiencies across what is now a pure hotel company will result in growth despite a very uncertain political and economic environment in the U.K. and additional costs pumped into ramping up its anticipated second country of scale: Germany.

DUNSTABLE, England—Whitbread PLC, parent company of Premier Inn, will not stall on investment in its principal United Kingdom market despite a challenging economic and political environment, executives said.

During a presentation of the firm’s third-quarter 2018 earnings, CEO Alison Brittain said Whitbread is trying to provide a little certainty in a market that currently contains heightened uncertainty.

She also said the board wants to be cautious regarding announcements for the firm’s top line and not to give any speculative color around possible rebounds in travel demand for the post-Brexit era, which might result in profits being more subdued in 2019 and 2020.

“We are cautious on sales,” said Nicholas Cadbury, Whitbread’s group finance director. “On the top line, we are expecting no help from the market at all.”

Cadbury added that guidance for full-year 2018 remains in line with expectations despite recent softer quarters.

“Efficiencies have come in quicker than we thought,” he said.

Brittain said tough conditions in the U.K. most likely would result in the continued demise of the independent hotel market, as independent hotels exit more quickly, which would provide opportunities for established budget brands such as Whitbread’s Premier Inn.

Whitbread will hold its profits year after year while others might see losses, she said.

Whitbread is sitting pretty on cash following the 3 January completion of the sale of its Costa Coffee division to Coca-Cola for £3.9 billion ($5.02 billion), a deal first announced on 31 August.

Details of how that cash would be returned to shareholders will be announced on 13 February, Brittain said, who added the completion had been “achieved ahead of schedule, well ahead of schedule … having had a very late-in-the-day (European Union) approval on 21 December.”

Presenting quarterly results for the “first time … as a focused hotel business,” Brittain said Whitbread would “commence our initial buyback program of up to about £500 million ($645 million), which will start today, and that will run probably until our full-year results announcement in April.”

The U.K. market held up in the third quarter and throughout 2018, she said.

“Premier Inn performed well during a challenging trading environment, with U.K. total group accommodation sales up 3.5%, driven by continued hotel capacity addition,” Brittain said. “This growth along with the continued success of our efficiency program means we are on track to deliver full-year performance in line with this year’s expectations.”

Like-for-like accommodation sales for the total U.K. dropped 0.2%. Occupancy fell 0.8% to 82.5% while average daily rate declined 0.5% to £63.66 ($82.14) and revenue per available room decreased 1.4% to £52.55 ($67.81).

“The London market had a strong third quarter, and Premier Inn grew sales there 9.8% in line with the midscale and economy market,” Brittain said. “Conversely the regional market was weaker … due to lower confidence and higher levels of inflation affecting both business and leisure customers, and Premier Inn grew total sales (there) by 1.8%.”

She said continued efficiency programs will help to fuel further growth and add scale. But while the company estimated savings from continued efficiency programs at £40 million ($51.6 million) to £50 million ($64.5 million), additional costs and inflation would most likely come in at £20 million ($25.8 million) to £30 million ($38.7 million) more than those numbers at around £70 million ($90.3 million), she said.

“While Premier Inn’s superior margin structures make us more defensive to the impact of lower demand than most of our peers … we do think the U.K. hotel market continues to present an attractive long-term opportunity. We continue to win market share from the independent market by delivering high-quality capacity at good value for money,” Brittain said. “We are cautious on the macroeconomic environment next year, (and) we expect inflation will remain a significant challenge along with probably weaker market (revenue per available room), especially in the regions.”

New brands, new rooms
In 2019, Whitbread is confident in opening between 3,500 and 4,000 new rooms in the U.K. and growing its committed pipeline, which Brittain said already contains approximately 14,000 rooms.

She added the firm’s debut German hotel, in Frankfurt, now has occupancy levels she described as “mature.”

In Germany, Premier Inn has a pipeline of 34 hotels in 15 cities. Brittain said in that market the firm will need to invest considerable capital before revenue generation occurs, resulting in losses of approximately £12 million ($15.5 million) in the next financial year.

Money invested now in that market would allow bookings to start by the end of next month, Brittain said. Freehold, leasehold and organic expansion are all options being considered by a very active German acquisitions team, Brittain added.

Increased costs of ramping up investment in Germany will inevitably compromise profits for the entire chain, executives said.

Brittain said the expectation is that another 16 hotels and approximately 2,500 rooms will be opened in Germany by the end of 2020, including 13 from acquisition of the Foremost Hospitality Group GmbH portfolio announced last February.

No additional news was given on the firm’s latest brand, Zip, launched on 24 October, which is expected to debut its first hotel, a 138-room hotel in the Roath district of Cardiff, Wales, in a period of weeks.

When the brand was announced, Brittain said it is a “super-budget, no-frills brand serving a customer who does not stay at a Premier Inn or any other branded hotel.”

Last week, Whitbread announced it has purchased a freehold on a site in Dublin 1, the Irish capital’s principal neighborhood, as it seeks to grow its current Dublin room count from approximately 300 to approximately 2,500.

As of press time, Whitbread’s stock was trading at £4,766 ($6,148.36) per share, down 0.2% year to date. The Baird/STR Hotel Stock Index is up 1.4% since the start of 2019.

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