UBS upgrades Whitbread to 'neutral' as Premier Inn concerns ease
Shares in Premier Inn and Costa owner Whitbread received a boost on Friday from UBS which upgraded its rating on the stock from 'sell' to 'neutral'.
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The bank hiked its target price on the shares from 4,700p to 5,400p, but said: "The valuation is certainly not cheap."
UBS downgraded Whitbread to 'sell' back in September 2014 on the back of concerns about Premier Inn, warning that revenue per available room (RevPAR) growth would slow in the fourth quarter ended February 2015 given tough comparatives.
However, the company beat expectations in a trading update last month by reporting 9% RevPAR growth for the full year.
At the same time, UBS had predicted that opening targets for Premier Inn rooms were thought to be "too optimistic", and a recent trading update confirmed that targets would not be met.
"So our negative catalyst played out, but the market did not react. It seems the market is happy for management to open fewer rooms, provided it generates high return on invested capital, rather than simply hitting targets," UBS said.
As for Costa, the bank pointed out that the business is still at an earlier stage in its growth than rival Starbucks, with its international business still unprofitable. Revenue growth is expected to be faster at Costa in the near term, though margins will remain lower than Starbucks'.
What UBS did not factor into its calculations for Costa, however, was Friday's launch from pubs group JD Wetherspoon of an aggressive price-led assault on the breakfast market, with 99p, free-refill coffee.
The stock was up 1.7% at 5,350p by 10:18.