Broker snap: Whitbread to benefit from rapid UK recovery, says Citi

11th Oct 2013 09:19

Whitbread, the owner of the Premier Inn, Beefeater and Costa chains, was making gains on Friday morning after Citigroup upgraded the stock from 'neutral' to 'buy' on the back of an improved outlook for the UK economy. The company, which also runs pubs and restaurants under the brands of Taybarns, Brewers Fayre and Table Table, has a great deal of domestic exposure, the US bank pointed out. As such, it believes it is the "best exposed to the expected rapid economic recovery that we think is underway in the UK"."In the near term, we expect WTB to lag the sharp recovery in the UK economy segment, which we think is being led by Travelodge. Nevertheless, 3% expected gross domestic product growth in 2014 should be a powerful stimulus for the overall hotel market and we do not expect WTB to be immune."The stock has been under pressure since the second-quarter update in September given the market's disappointment in underperforming revenue per available room (RevPAR) growth. Citi said that this largely reflects rival Travelodge rebounding from a very tough 2012."Although hard to be precise, on a two-year basis we think Travelodge is now running roughly flat in Q2 versus WTB up c5%, suggesting this is mainly a bounce back. We continue to believe that WTB has a superior product."Meanwhile, while Premier Inn represents around 70% of Whitbread's underlying earnings, its other businesses should also benefit from the UK recovery, the bank said, although warned it "sees less direct gearing than for hotels".Citi expects a "solid" interim report on October 22nd from the group and forecasts earnings before interest and tax of £229m. The target price for the stock has been increased from 2,900p to 3,570p.Whitbread gained strongly on Thursday after an analyst at Oriel Securities cited the possibility that it could spin off its Costa coffee chain. The share price was up 1.41% at 3,158p on Friday morning, meaning that the stock has risen by nearly 7% since the start of the week. BC