Investors’ Chronicle: Whitbread, Sanderson Design Group, Associated British Foods

BUY: Whitbread (WTB)

A recovering hotel market plays a big role in Whitbread’s outperforming results, writes Julian Hofmann.

Full-year results for hospitality giant Whitbread showed the powerful impact of a return to reasonable levels of hotel occupancy after a long recovery period in the aftermath of the pandemic. For example, in the company’s core UK market, revenue per available room leapt by 55 per cent compared with 2022 to just shy of £60.

The results clearly showed that guests have acquired a renewed appetite for short breaks that typically involve a stay at a Premier Inn (typically weddings and stag/hen parties) but which could also be linked to a reviving UK inland holiday market. This, combined with an attractive share buyback programme of £300mn this year and hiked dividend, explains the solid run the shares have enjoyed since the start of the year.

The results showed definite signs of operational gearing in the UK business as margins grew exponentially during the year from 4.5 per cent to 19.6, despite the impact of inflation on staff costs, and there was a corresponding improvement on return on employed capital to 12.9 per cent. Total UK revenue was up 50 per cent to £2.5bn.

Whitbread looks set to keep investing in its UK estate and expects to add between 1,500 to 2,000 rooms during this financial year, with total capex spending at the group level expected to be between £400mn-£450mn. A slight crinkle was the performance of the food and beverage division, with the company’s standalone restaurants and pubs generating an impairment charge of £54mn as inflating costs and penny watching consumers affected the performance.

Whitbread’s shares have rallied by 27 per cent since the start of the year and vindicate the view that its growth profile was being underpriced in all the doom and gloom at that point. The results showed the value of its operational gearing, which also explains the high rating of 37 times consensus forecasts for 2024. Given Whitbread’s excellent operational execution, we think running the profits on our buy idea is a decent strategy.

HOLD: Sanderson Design Group (SDG)

Sales volumes are under pressure, but action on pricing and cost controls have supported margins, writes Mark Robinson.

On balance, shareholders in Sanderson Design Group will be satisfied with the company’s full-year performance given wider economic challenges, such as the cessation of trading in Russia. Sales were flat on the prior year, but there was a 50-basis point increase in the gross margin to 66.3 per cent, which, along with a marked increase in net finance income, boosted earnings.

Sales softened in the UK and Northern Europe, but product sales in the targeted US market were up by 6.3 per cent in constant currency. Sanderson’s manufacturing operations, which produce fabric and wallpaper for its own brands along with third parties, performed admirably against what management described as a “strong comparator in the previous year”.

The company’s licensing activities were also encouraging with revenue up by 25 per cent through the period, while future revenue visibility was enhanced by licence renewals for the likes of Bedeck, NEXT and Williams Sonoma. That’s important given that an increased proportion of high-margin licensing is supportive of earnings. In addition, the National Trust collaboration was extended for a further 2 years, and the company struck a deal with US media giant Disney to revive vintage Disney characters in the Sanderson archive from 1936. Investors would do well to monitor whether the apparent progress in the potentially lucrative US market is maintained.

Management responded to rising input costs by implementing price increases in February and August of last year. Bearing this in mind, the flat year-on-year revenues suggest that trading volumes are under pressure — hardly surprising given the inflationary backdrop. So, a deteriorating forward rating of 11 times FactSet consensus earnings suggests that investors are up with events.

HOLD: Associated British Foods (ABF)

There has been encouraging news on US expansion and the extension of the click-and-collect trial, writes Christopher Akers.

Associated British Foods could not escape the consequences of a less than rosy outlook statement. The shares were marked down by more than 5 per cent after the company said it expects revenue growth at Primark to weaken in the second half of the year due to concerns “about the resilience of consumer spending in the face of ongoing inflation in the cost of living and higher interest rates”.

Continuing cost challenges — freight and utilities inflation have softened but labour costs are expected to rise further — and the decision to protect the brand’s value reputation by not fully recovering input cost inflation meant that management guided for an annual adjusted operating margin of around 8.3 per cent for the retail side of the business, a contraction from the 9.8 per cent posted in 2022. The market wasn’t overjoyed.

But there were also some major Primark positives to take from these results. The top-line performance in the half was robust, with sales up by 19 per cent to £4.2bn on the back of higher prices and volumes as footfall improved and new stores were opened.

The company announced plans to develop a “significant presence” in the southern states of the US, with a second American distribution centre being constructed and leases expected to be signed in the coming months. Meanwhile, the company’s click and collect trial has delivered “encouraging results” and will be extended to 32 stores. And the board is bullish about getting the Primark margin back above 10 per cent. This all bodes well for the future of the division.

While Primark usually takes the headlines when it comes to ABF, which is unsurprising given it is by far the largest part of the business, it shouldn’t be ignored that the company’s food divisions put in a solid shift in delivering an aggregate 23 per cent revenue increase to over £5.3bn. Grocery sales were up 16 per cent, sugar up 30 per cent, agriculture up 17 per cent, and ingredients up 36 per cent. The latter division posted a notable 62 per cent increase in cash profits. Cost pressures were also evident across food segments too, though, particularly in grocery and agriculture.

City analysts value the shares at a consensus 15 times forward earnings, according to FactSet, which represents a 7 per cent discount to the five-year average. Broker Shore Capital argued that “we see tailwinds building across the [company’s] categories for full-year 2024 and beyond”. But this already looks baked into the rating.