Investors’ Chronicle: Whitbread, N Brown, Bellway

BUY: Whitbread (WTB)

Supply and demand dynamics are playing in the company’s favour, writes Christopher Akers.

Whitbread’s shares have climbed by a third over the past year, helped by a resilient UK leisure market. Hotel demand is holding up in the face of cost of living pressures — according to software platform Siteminder, UK forward hotel bookings currently sit at 102 per cent of 2019 levels. The Premier Inn owner’s relatively cheap rooms are pulling in customers in a time of tightened budgets, with an average room rate (ARR) of £84 in the UK in the first half.

The half-year results make clear that things are continuing to move in the right direction after the strong first-quarter trading update in June, as the company raised its dividend by 40 per cent and announced a new £300mn share buyback programme. Upping the return of capital looks like a justified sign of confidence, with the company enjoying a favourable supply and demand environment and making progress in both its UK and German markets.

Whitbread continues to benefit from the contraction in independent hotel supply following the pandemic and a lack of new hotel construction. Management thinks UK supply won’t return to pre-pandemic levels for at least five years, and the company is reaping the rewards. In its key domestic market, Premier Inn made market share gains in the half and enjoys a share of almost 9 per cent.

UK revenues rose 14 per cent to £1.5bn as accommodation sales climbed by 15 per cent. An occupancy rate of 84.4 per cent was down slightly against last year, but this remains a high level, and it supported a 10 per cent uplift in food and drink sales. Revenue per available room (revpar) came in at a £7 premium to the wider market. Return on capital employed came in at a record 14.8 per cent.

There were also positive developments in the highly fragmented German market, where Whitbread continues to make inroads. Losses narrowed to £14mn in the half as revenue climbed 81 per cent to £95mn, and management still expects to hit break-even in the country in 2024. The company has 57 hotels in Germany, with 10,250 current rooms and a pipeline of over 5,800 rooms.

Expansion plans and the return of capital are supported by strong cash generation and an attractive freehold-heavy balance sheet. Adjusted operating cash flow was up £73mn in the half to £483mn. Once German operations become profitable, cash flows should significantly improve. 

Strip out lease liabilities from the balance sheet, and the company sits in a net cash position. Higher interest rates contributed to the profit increase, with bank interest income rising from £6.1mn to £25.8mn year on year. Lease-adjusted leverage was 2.5 times as at August 31, well below the company’s target of 3.5 times. 

As Peel Hunt analysts note, Whitbread’s leading market position “coupled with a balance sheet that gives it the pick of sites and conversion properties, makes it terrible to be a competitor”.

Full-year guidance was maintained, other than a raising of the gross capex forecast to a range of £500mn-£550mn, up from £400mn-£450mn before. Cost inflation is still expected to come in at a manageable 7-8 per cent, and the company remains on track to open 1,500-2,000 new rooms in the UK this year. 

Current trading signals that growth prospects remain strong. UK accommodation sales were up 13 per cent against last year in the six weeks to October 12, with food and drink sales up 8 per cent and forward booked revenues “well ahead of last year”, according to the company. In Germany, accommodation sales grew by 44 per cent. 

The City certainly thinks the good news will keep coming. The analyst consensus is for steady revenue and cash profit growth in the coming years. Broker Shore Capital said it expects to increase its forecasts for the company for the fourth time this year on the back of the results.

The shares trade at 16 times consensus forward earnings, according to FactSet. That is a significant discount to the five-year average of 38 times. With solid trading, a supportive balance sheet, pre-tax margins above pre-pandemic levels, and an increasingly attractive return of capital profile, we remain bullish.

SELL: N Brown (BWNG)

The online retailer is losing customers in what appears to be a continuing trend, writes Christopher Akers.

After years of revenue falls, it isn’t a surprise to report that N Brown’s top line moved in the wrong direction in its latest half-year period.

In an update in June, management pointed to unhelpful spring weather and low consumer confidence as key factors behind weak trading. The Aim-traded online clothing and footwear retailer swung to a loss as wet weather in July and August also deterred shoppers from updating their wardrobes.

Revenue contraction was, unsurprisingly, seen across both the company’s divisions. The broader post-pandemic ecommerce comedown is hurting. Product revenue fell by 11 per cent to £188mn. Lower retail sales had a knock-on impact on financial services revenue, which was down by 9 per cent to £110mn.

A glance at the company’s key performance indicators highlights the scale of the challenge as it tries to turn things around. Website visits fell by 13 per cent, order numbers fell by 18 per cent, and active customer numbers fell by 14 per cent against last year.

On the plus side, the gross margin was up 40 basis points, helped by improved freight rates and lower underlying financial services arrears. And adjusted cash profits of £18mn were in line with board expectations. Management forecasts profits of £45mn for the full year, although this would be a £12mn annual fall. 

With sales headwinds set to continue, we see no reason for an upgrade. House broker Shore Capital said that strategic progress has provided a basis “to ponder a return to much stronger profit growth and cash generation in the medium term”. That looks like wishful thinking based on the current evidence.

HOLD: Bellway (BWY)

The housebuilder’s figures were no worse than the market expected, but a lot of hope rests on an improvement next year, writes Julian Hofmann.

Housebuilder Bellway had already given a masterclass in how to “kitchen-sink” the worst of the bad news in a trading update in August, which meant that the figures as presented were no worse than anyone expected, and which gave bargain hunters the cue to rally to the shares. A combination of higher interest rates, the end of Help to Buy and the general state of Britain’s sickly housing market — weekly reservations from private buyers were down 35 per cent — meant that expectations for the results were held firmly in check.

Operationally, most of Bellway’s metrics were in negative territory. For instance, completions were 2 per cent lower at 10,945, with the average selling price dropping by over £4,000 to £310,306. That was reflected in the underlying operating margin of 16 per cent, down two percentage points on 2022, due to residual materials price inflation, lengthened site occupation because of slower reservations and more incentives offered to potential purchasers. Average selling prices for 2024 are now forecast to be £295,000. There was some positive news in the fact that legacy building safety charges for the year fell considerably and Bellway booked £49.6mn, compared with the £346mn hit it took in 2022.

Management did point to the positive news that social housing completions were higher and now make up 25 per cent of the company’s total completion rate. The problem here is that social housing does not come with the same level of profitability, with negative consequences for the overall margin mix. In the meantime, the proportion of social housing completions is only expected to grow.

The damage limitation exercise has been successful enough to ensure a healthy pick-up in the share price over the past quarter as investors noted Bellway’s relative discount in price to net tangible assets when compared with the rest of the (ailing) housebuilders; the sector currently runs at one times price to net tangible assets.

Broker Numis said that its private sales run rate assumed a rate of 0.46 times, compared with the 0.41 times the company achieved over the summer, with some improvement seen in October. So, there is room for an uplift if progress continues. However, investors will be wary of a major dividend cut as the current policy stipulates 2.5 times earnings cover, which it is unlikely to achieve. The balance sheet looks stable, with no obvious need for a major refinancing, but most of what affects the sector is out of its control.