Good morning,

When I mention the name Whitbread to an investor I get a blank look followed by ‘I have never heard about this company before.’ However, when I go on to explain that this Group owns the Premier Inns brand and the Costa Coffee chain, the investor’s facial expression changes into one of acknowledgement.

Premier Inns have over 670 hotels, the majority of which are in the UK, with the highest presence in London and Edinburgh. They also have five hotels in the Middle East and three in India.

Costa Coffee on the other hand has 1578 stores in the UK and 949 stores overseas with a presence in 29 countries.

In my opinion, this company is not only in the right sector to be invested in at the moment but is also run by a management team that has a reputation of beating its own forecasts. The shares are up 10% year-to-date and 43% since the beginning of 2013. I expect this positive momentum in the shares to continue in the years ahead mainly due to revenue being driven by an increase in:

Available Rooms – Management expect to increase the number of available rooms from 55,000 in 2014 to 75,000 in 2018.

Occupancy rates – Occupancy rates in London have been increasing year on year. I expect it to continue to increase due to strong market fundamentals. According to a study by PWC UK titled ‘Growth beds in UK hotels forecast 2015’ they are forecasting an occupancy rate of 84% in London in 2015.

They also anticipate that the Rugby World Cup, which will take place between 18 September and 31 October 2015, could be a significant demand driver, pushing London hotel occupancy up further.

Resilient UK economic recovery – The UK economic recovery is gathering momentum and as it takes a stronger hold it should boost London and regional travel and consumer confidence.

Revenue per Available Rooms – Revenue per available room in London is expected to continue to increase with PWC forecasting an increase of 5.1% in 2015.

Market Share – Increase in demand is expected to come from winning over market share from independent operators not just from growth in overall demand. Over the last 5 years branded budget hotels continued to win market share from independent operators. There is a clear shift in the demand from customers. Customers are shifting out of independent operators (especially in the city of London) and opt for a budget hotel which offers high standards of service.

Costa Coffee represented 35% of sales in FY13/14 and we expect this percentage to continue to increase. Management expect sales of Costa to double by 2018. We are confident that management will reach its target for Costa. Particularly because they been reached over the last 5 years.

Moving away from revenue drivers and focusing on cost management, I also expect operating costs as a percentage to sales to fall going forward as the Group continues to expand and fixed costs are distributed amongst a larger business model.

Weighing the pros and cons, I am of the opinion that Whitbread offers decent returns in a sector that is experiencing rapid growth. The stock is sensitive to economic growth and travel related risks but it offers above average value for the patient investor. Whitbread also pays a dividend to shareholders.

Good day and happy trading!

Kristian Camenzuli