UK Edition
Questor: it may be selling Costa but Whitbread will remain an ‘extraordinary’ business
Coca-Cola’s purchase of the Costa coffee chain from Whitbread for £3.9bn was, by universal agreement, a brilliant deal for the British company. But what does the future hold for it now?
Once the sale is finalised next year, Whitbread will consist mainly of the Premier Inn hotel chain, along with some pubs and restaurants whose purpose is largely to serve guests of the hotels. And Premier Inn, according to one respected fund manager who owns a stake in Whitbread, is quite a business.
It has a clear growth plan that relies on a tried-and-tested strategy, has an excellent reputation with its customers and makes high returns on its assets – returns that can be used to fund expansion and that the company expects to maintain as the chain gets bigger.
“The stock market sees the post-Costa Whitbread as an ordinary business whereas I think it will be an extraordinary one,” said Ciaran Mallon, who runs the Invesco Income Growth investment trust, a constituent of Questor’s Income Portfolio.
“Premier Inn is unashamedly a budget chain but it is also a high-quality one,” he said. “The rooms are clean, the staff are friendly. Customers know what they will get, so they are happy to book online and to keep coming back.” Occupancy rates are about 80pc.
He said the company had done a good job in building direct relationships with customers, which meant they were happy to book on its own website rather than via third parties such as hotels.com, which would take a cut of the price.
The chain’s growth strategy is compelling to Questor’s ears. It can gauge where there is unmet demand by the booking patterns on its website (another benefit of the direct relationship). In areas where it is confident that extra rooms could be sold its preferred way to expand capacity is to extend existing hotels.
“This is more efficient because you don’t need to build new reception areas and the rest of it – all your spending goes on new rooms,” Mallon said.
This approach is also easier in terms of planning and, because Premier owns the freehold to many of its sites, there is no landlord whose permission is needed for new building.
But, where necessary, the chain will also build new hotels from scratch and will occasionally make acquisitions. It currently has 72,000 rooms in Britain, with another 13,000 in the pipeline by 2020. The longer-term aim is to reach 100,000.
The discipline that the chain brings to its expansion is shown by the fact that returns on capital have been almost constant at about 13pc a year over the past few years despite a 34pc rise in the number of “room nights” it can offer from 19m in 2014 to 25.5m this year.
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Over the same period sales from Premier Inn and the restaurants arm have risen from £1.5bn to £2bn while underlying profits have increased from £349m to £498m. Overseas expansion is also well thought out. Here the chain has dipped a toe in a couple of markets and experimented with strategies such as franchising but has now decided to concentrate on Germany and use the model that has worked in Britain.
“Germany is a bigger market than the UK and its consumers are famously budget-conscious but the branded budget hotel sector is currently smaller at about 6pc of the market, so there is lots of room to grow,” Mallon said.
He added, strikingly, that “Premier Inn is the No 1 ranked hotel of any kind in Frankfurt on TripAdvisor and has been since it opened”.
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There is a pipeline of 11 new self-built hotels in Germany and Premier Inn has recently bought a chain of 19. Its presence in the country will take time to grow and returns there will not reach UK levels while it does, Mallon acknowledged.
He also stressed that demand for hotels from both business and leisure customers was cyclical. “Premier Inn is a great competitor but it’s not immune from economic downturns,” he said. The business has some debt, £833m at the year end, but this is “prudent” relative to its billions of pounds worth of freehold property, the fund manager said. Cash conversion is also good.
“The lesson from Costa is that Whitbread is a business that’s good at growing businesses,” he concluded.
Questor says: buy
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