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UK hotels and coffee shops have limited opportunities growth - Citi

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UK hotels and coffee shops have limited opportunities growth - Citi

Tue, 12 September 2017
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UK hotels and coffee shops have limited opportunities growth - Citi
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(ShareCast News) - European hotels and leisure operators are being disrupted much more than expected by Airbnb, online travel agencies and other parts of the sharing economy, Citigroup said as it downgraded Premier Inns owner Whitbread on Tuesday.
Citi also said its in-house research had "debunked" the structural growth story for UK coffee shops, forecasting there is just "4-5 years structural growth left in the branded UK coffee market" for Costa, Caffe Nero, Starbucks and Greggs.

Admitting it previously underestimated the growth of online travel agencies (OTAs) and the sharing economy, the bank calculated that if current growth rates continued to 2020, these operators would all roughly twice as large "than even the biggest global hotel chain" or around five times larger than most of the top chains.

"We see some potential for over-supply in the UK hotel market, if supply growth from the sharing economy starts to have an impact," wrote analyst Monique Pollard as she took over coverage of the sector.

She forecasts 2-3% growth in UK revenue per available room (revpar), implying just 0.5-2% revpar growth for Whitbread's Premier Inn, which is expected to lead to margin contraction due to a combination with rising rent costs as Premier's leasehold proportion increases.

"Meaningful international growth remains elusive given both brands limited scale outside the UK. We believe significant capital would need to be invested to make international growth more meaningful to the group, which carries obvious risks.

"Whitbread could raise equity and make considerable investments in international organic growth opportunities, but rapid expansion into new markets would reduce certainty on its returns profile."

Pollard moved the Costa Coffee owner to a 'sell' from 'buy' and slashed the target price to 3,200p from 4,800p.

Intercontinental Hotels Group kept its 'neutral' rating under Pollard, as she expects the Holiday Inn and Kimpton owner's predominantly US exposure to drive a slowdown in its revpar growth over the next few years, as the US hotels cycle continues to mature, and sees slight over-supply.

IHG is forecast to face a near-2%-per-year revpar deceleration, which is only partly offset by accelerating system growth as its accelerates room openings and reduces exits.

"However, we remain positive on IHG's cash profile and the potential for additional cash returns to shareholders, believing there is headroom to return an additional 17% of its market cap (31% including its dividend) over the next four years via share buybacks or special dividends."

France's Accor remains a 'buy' for Pollard based on its planned property company spin-off, which is forecast to lead to a €2bn cash return.

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