Whitbread PLC

Whitbread PLC is a hospitality brand with a really interesting story. They are headquartered in the UK with global hotel, coffee shop and restaurant operations. Originally started out as a brewery, they sold all their pub and bar operations by 2001, which initiated their foray into the hotel and restaurants market. Their main brands include:

• Premier Inn (launched in 1987 as Travel Inn)
• UK's largest budget hotel chain.
• 662 hotels, over 47000 rooms - in the UK, UAE, India and Republic of Ireland.
• Makes up 70% of Whitebread's earnings.
• Plans to increase total rooms by 40% (18000) by 2016.
• First budget chain to invest in prime time television advertising with celebrity endorsements.
• Has won numerous awards for both e-sales services and hotel quality.
• Costa (acquired in 1995)
• Coffee shop chain with over 1300 locations in the UK and 800 overseas.
• Second largest coffee chain in the world, largest and fastest growing in the UK.
• Costa Express - 1192 selfservice coffee machines.
• Table Table (launched in 2006)
• Restaurant chain with 116 locations in the UK.
• Beefeater Grill (launched in 1974)
• Pub restaurant with 135 locations in the UK, most with a Premier Inn next door.
• Brewers Fayre (launched in 1980)
• Family and casual pub restaurant chain with 129 locations in the UK. Most are on-site at a Premier Inn.
• Taybarns (launched in 2008)
• British low-cost buffet with 7 restaurants in the UK.

Strategy overview:

• Build strong brands on consistently delivering great customer experience.
• Expand strong UK brands like Premier Inn and Costa into the international market.
• 16Jan12 - "World's Leading Budget Hotel Brand" - 2011 World Travel Awards.
• 12Dec11 - "Occupier of the Year", "Front Cover of the Year" - Estate Gazette Awards
• "Best Value Hotel Chain" - YouGov
• Whitbread is pursuing aggressive growth:
• Expand Premier Inn by adding 4200 rooms/30 hotels and 6 new restaurants by end of 2012.
• 20Apr12 - secured planning consents for 8 new hotels/1000 new rooms in 4 weeks. Leasehold and freehold properties. Open and trading by 2014/2015.
• 29Mar12 - complete deal with Beltane Asset Management to open 184 room hotel in the City of London. London seen as key growth market.
• 16Mar12 - 8 new sites secured totalling over 340000 sq ft, adding 774 rooms. 3 located inside of London, the core growth market. Strong customer demand for Premier Inn.
• 2Feb12 - Completed 120 room hotel and restaurant in High Wycombe. Acquired site from the council to maximise re-use of surplus public sector property.
• 16Jan12 - Submits planning application for 120 room hotel and restaurant in Worcester.
• In 2011, Whitbread opened 4055 new rooms in 29 new hotels and 12 new restaurants - highest organic growth to date.
• Growth in London is a key focus - 7225 rooms vs 14000 rooms by 2016. London hotels will have a similar cost base but significantly higher sales and hence more profitable.
• Expand Costa Coffee by adding 350 new stores globally and 1000 Costa Express machines. Increase system sales to £1.3bn.
• Collaboration with Kraft Foods. Tassimo coffee machine. New revenue stream by bringing Costa coffee into the household.
• By 2016: 65000 Premier Inn rooms in the UK, 3500 Costa stores worldwide, 3000 Costa Express machines.
• Sustainability - reduce carbon emissions by 26% by 2020.
• 26Mar12 - photovoltaic cells installed in 10 hotels. Save more than 42 tonnes of carbon dioxide a year.
• Team mentality and culture.
• 2Feb12 - "Sharesave" scheme meant employees made more the £4.3 million in profit. Employees can save money to purchase shares at a discount.

Company structure:

• CEO Andy Harrison reports to the board of directors - ultimate authority for decision making.
• Chairman Anthony Habgood.
• Executive committee - formed of the MDs of the children companies.
• Management boards - a board exists for Costa and Whitbread Hotels & Restaurants, responsible for main functions and operations.

Business analysis:

• Defensive stock - consistent payment of dividends. Increasing dividends from 36.55 in 08/09 to 51.25 in 11/12.
• Strong, consistent, continued growth in revenue, EPS and profit despite economic difficulties. £1.778bn revenue in 2012.
• Double digit revenue, profit, EPS and dividend growth.
• Premier Inn
• Sales up 8.3% to £755.9m.
• Outperforming the UK economy and midscale hotels. Management is confident of continued outperformance through their Flexible and Saver rates.
• Strong position in terms of financing and debt as it owns over 85% of all hotel freeholds.
• Difficulties facing competitors like Travelodge, who had to taken an emergency bank loan whilst restructuring debt. Limited capital expenditure, which means its original plans to open 3600 rooms may be scrapped and potentially have to close less profitable locations.
• They are continuing to offer £10 rooms which demonstrates the price sensitivity of the market.
• Olympics will provide a significant demand boost.
• Two new non-executive board members: Susan Hooper (significant experience in the travel industry), Susan Taylor Martin (President of Reuters, influence during technological and corporate change).
• Polarisation of the industry into economy and luxury ends of the spectrum. Economy boasts margins of around 60% due to low operating costs and smaller space - highest margins in its peer group of around 45%
• Should property sale be considered?
• Generating cash for capex - more cash generative.
• Provide dividend cover.
• Increase leverage.
• Costa
• Sales up 27.5% to £541.9m.
• Impressive store growth in China. From 21 in 2007/08 to 164 in 2011/12. Projecting 500 stores in 2015/16.
• Like-for-like sales growth of 33%, 17% margins (from 5% in 2009/10).
• Going by their current growth rate and successes, 500 could be a modest target.
• Successes in Tier 2 and 3 cities with combined population of 750m. Currently has 50 stores in 14 cities.
• With economists estimating that the middle-income class will grow at the quickest pace (reaching 28% of total urban households, 76.4m), this bodes well for Costa as a service provider.
• Middle-income class+ will reach 32% of urban households. This increases the Costa target market from 18m households to 87m.
• Using existing UK numbers of customers per store, we arrive at a figure of just under 18000 potential stores in China, compared with 1000 that exists currently.
• Top three areas outside the UK: India (95 stores), Poland (93 stores) and UAE (80 stores).
• Well on track to beat targets as actual growth is significantly higher than implied needed growth.
• Pure hoteliers trade higher at 7-13x EV/EBITDA, quick service restaurants trade on 11-14x EV/EBITDA. Whitbread trading lower due to conglomerate discount.
• Demerge Costa? Worth 30-40% of EV, up to 50% of market cap but only 20% of group EBIT.
• Attractive due to strong market position and growth prospects, better EPS growth than group, better cash generation due to leaseholding property, costs can be met from FCF, easy debt/equity issue if acquisition required.
• Similar to Starbucks in terms of international-local EBIT split (15-85, 11-89 for Starbucks).
• Starbucks profitability ahead due to its scale which is being reduced by Costa growth.