Britain’s hotels are full – buy shares in this stock for a piece of the action

Questor share tip: this hotelier's gains are driven by more than pent-up lockdown demand

Russ Mould 2 May 2023 • 6:00am

Better-than-expected full-year results, a positive start to the new trading year and analysts’ forecast upgrades all mean that this column remains very comfortable with Premier Inn-owner Whitbread (WTB).

Market share gains, strong pricing and the long-term upside in Germany all suggest the stock is capable of delivering both capital appreciation and dividend growth for the patient investor.

There are many reasons to be glad why the Covid and lockdown-afflicted days of 2020 and 2021 are behind us and the management team at Whitbread will no doubt be particularly pleased.

Last week, new chief executive Dominic Paul, who took over after Alison Brittain’s decision to step down in January following her seven years at the helm, unveiled a substantial increase in sales, profits and the dividend for the year to February, and launched a £300m share buyback for good measure.

Doubters may shrug that improved performance was likely given the absence of lockdowns, but that ignores the input cost inflation from wages, utility bills and food and drink suppliers with which the group is having to grapple.

Moreover, the numbers behind the headlines point to the strength of the investment case.

In the UK, sales from accommodation were 37pc higher than pre-pandemic levels and food and beverage sales were just 4pc lower. Better still, both are up nicely in the first seven weeks of the new fiscal year, with accommodation up 17pc and food and beverage 10pc as both business and leisure travel continue to pick up.

UK occupancy rates stand at record highs, and this is translating into pricing power, with revenue per available room higher by a quarter than 2020’s pre-pandemic levels. This is the result, in turn, of the ongoing roll-out of new rooms which is helping Premier Inn gobble up market share from less well-financed rival groups and especially small-scale independent operators.

The plan is to add another 1,500 to 2,000 rooms to the existing UK estate of 89,000 in the year to February 2024.

Profit margins in the UK are already comfortably double-digit and new room growth and cost efficiencies are expected to offset the 7pc to 8pc input cost inflation that management expects for the year.

Note that every 1pc change in accommodation sales adds (or subtracts) around £15m of pre-tax profit, while every 1pc change in food and beverage revenues equates to a £4m swing, up or down.

If the UK is starting to fire on all cylinders, then the German operation is just starting to rev up.

Premier Inn has 9,000 rooms across 51 hotels and has 7,000 more in the pipeline, of which 1,000 to 1,500 will open in the next twelve months.

This ramp-up generated losses of £50m last year, not helped by a collapse in German consumer confidence as gas and energy prices soared, and Mr. Paul has put out a forecast of another deficit of £30m to £40m for the new fiscal year.

The heavy initial investment should eventually bring benefits of scale, and improved pricing could help erase the trading deficit, which is depressing near-term earnings and therefore means the valuation is deceptive, at nearly 19 times forward earnings, a premium to the wider UK market.

Cash flow is healthy, the balance sheet bears relatively little financial debt and Whitbread has a pension surplus. Note, however, there are £4bn of lease liabilities which is why the firm shows a net debt figure overall.

Questor says: Whitbread looks like a long-term winner.

Ticker: WTB

Share price at close: £32.35

Update: Yellow Cake

The uranium market seems to be heating up and Yellow Cake (YCA:AIM) continues to add to its holdings of uranium oxide (U₃O₈), a key step in the process of nuclear fuel rod enrichment, in its specialised storage facilities.

Almost unnoticed, spot prices for uranium are ticking up to six-month highs, above $53 a pound and Yellow Cake is well positioned for a possible revival in nuclear power in response to the near-term energy crisis and long-term goals for decarbonisation.

The company is using February’s £62m raising to acquire a further 1.35 million pounds of U₃O₈ from Kazatomprom. Completion of the purchase will take the firm’s total holdings to 20.2 million pounds and at the prevailing spot price and dollar exchange rate that inventory has a net value per share of 446p, adjusting for cash and liabilities.

The shares trade at nearly a 20pc discount to that and they could yet add to our 60pc-plus paper profit (Questor, 11 Aug ’20).

Questor says: Yellow Cake is thriving – and has further to go

Ticker: YCA:AIM

Share price at close: 371p

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