The report discusses the nature of the hospitality industry in the United Kingdom. The Whitbread PLC is the company in question. The financial performance of Whitbread has been discussed at length in this report. The report further discusses the share valuation of Whitbread PLC to determine whether it is undervalued or overvalued. Recommendations are given at the end of this report advising investors on the investment decisions that they can take regarding their investment in the company.
From the analysis of the financial performance of Whitbread PLC, the findings reveal that the Company has sound financial performance. Out of the eight ratios used to analyse the performance of Whitbread PLC, six of them positively portray Whitbread PLC as an ideal investment venture. Whitbread financial brilliance is coupled with competent management skills from the leadership of company’s Chief Executive Officer. Furthermore, the analysis of the value of the company’s shares has been analysed to establish whether the future stability of the company stocks is guaranteed. The dividend per share growth reveals the company’s strength to ensure that the shareholder earn dividends on their stocks.
From the financial and share valuation, it is recommended that the existing investors can still hold the shares they have in the company. Furthermore, potential investors are encouraged to buy shares in Whitbread PLC. The performance of the company coupled with a predictable stable future makes it an ideal investment destination for investors.
Whitbread PLC Analysis Report
Before any business decision is made, one should consider various factors. An investor should describe what he or she is seeking from a certain investment. He or she should properly research about the investment opportunity before making a decision on whether to invest or not. The investor should do this through screening of relevant information concerning that investment opportunity (Bull, 2008).
Financial information is widely used in the world today in making such decisions. Financial ratios are majorly used by shareholders in analysing the performance of companies. This is done to ascertain how viable the companies are before making an investment decision. The investors use this information to compare the strength and weaknesses of various companies before making decisions (Bull, 2008).
Whitbread PLC is a publicly listed company in the United Kingdom’s hospitality industry (Whitbread Website, 2012). The company primarily operates restaurants, hotels, and coffee shops in the United Kingdom and Ireland (Ridder, 2012). It also operates four hotels in India and the Middle East. The major Whitbread brands include “premium Inn, Beefeaters Grill, Brewers Fayre, Table Table, Taybarns and Costa Coffee” (Whitbread Website, 2012, para 2). The company recorded improved performance of most of its brands. The Premium Inn and Costa divisions were identified as the main drivers (Investors Chronicle, 2012). The company is listed in the London Stock Exchange with its share trading fairly at stabilized prices. The share price of the Whitbread Company increased slightly to record an improved price of £ 2, 081 per share in the last quarter of the financial year that ended May 2012 (Investors Chronicle, 2012). The price per share also increased in the first quarter of the financial year. The share price moved up to £ 1500 per share from £ 1450 (Investors Chronicle, 2012). These positive indicators have prompted the company to embark on an ambitious plan to increase the number of hotel rooms and restaurants in the next financial year (Whitbread, 2012). Furthermore, Whitbread plans to expand globally by increasing the number of Costa stores through investment in Costa Express machines (Investors Chronicle, 2012).
Whitbread operates in a hospitality and leisure industry. The hospitality industry provides services in food and beverages and accommodation. Restaurants, hotels, pubs, bars and clubs are businesses that are included in this category. The industry is ranked fifth in the provision of employment within the UK (British Hospitality Association, 2012a). The industry has recorded significant growth over the past years. The investment levels in the European hospitality industry have increased in the past one year. Majority of hotel markets in Europe have registered significant growth despite the turmoil caused by the economic and financial uncertainties within the Euro Zone. However, the uncertainty of future economic impacts in the Euro Zone may negatively impact on the performance of Whitbread PLC (British Hospitality Association, 2012b).
Whitbread has a clear organizational structure that articulates the line of authority and decision making. The organization consists of highly motivated staff dedicated to the service of the hotel. The Whitbread board is the ultimate decision maker in the company. The executive committee is responsible for managing the company. Andy Harrison, the CEO, is a very experienced manager. He has previously served at the management level in various companies before his appointment as the CEO.
Bass and Riggio (2005) noted that effective management calls for independence and motivation of employees. Andy Harrison is a transformational manager who recognizes the importance of working together as a group. He is a leader who allows senior and junior employees to work independently towards the realization of Whitbread goals. His style of management has helped boost morale and motivation of the entire staff. The employees feel inspired by the strength and vision of the company CEO, and have positively worked towards achieving the same goal.
During the 2011-2012 financial years, Whitbread recorded a net profit of 266 million pounds. This depicts significant profitability of the company in the long run. The company’s financial performance can be analysed using various ratios (Whitbread, 2012).
Current Ratio: the company’s current ratio was at 0.4 for the financial year ending March 2012. The ratio is used to indicate that the company can repay its short term creditors from its assets. According to the analysis, the ratio suggests that Whitbread might not be able to pay its current debts. However, this is just a measure of the company’s liquidity, and it does not factor the real quality and value of the assets.
Return on Equity Ratio: the calculated return on equity ratios in the last five years indicate that the Whitbread ratios have steadily grown. The company registered the highest ratio in 2008, but it experienced a deep in 2009 when the ratio dropped by 42.29 per cent from the previous year to 8.14 (Whitbread, 2012). However, it has greatly improved to 20.94 in 2012. This indicates the ability of Whitbread to generate income for its shareholders, and it is profitably stable. However, this ratio is limited by the fact that its factors attributable to income only. This ratio ignores taxation implications and debts of the company that may greatly alter the returns that Whitbread investors are likely to get from their investment.
Return on Capital Ratio: the company ratios have relatively stayed stable over the last five years. The ratio was at 8.68 per cent in the year 2009. This has stabilised at 11.5 per cent for the last two years. From this ratio, Whitbread has the capability of sustaining income generation from the available capital investment. This ratio offers a comprehensive measure of Whitbread’s profitability. It also indicates that the management’s ability to use the investors’ capital and debt to generate revenues. The ratio does not factor depreciation and amortization of investor equity, which may be misleading information of the actual profit.
Dividend per Share ratio: the dividend per share for the company has been increasing since the year 2008. In the year 2008, the dividend per share was at 36 pence. This has increased by over forty per cent to settle at 51.25 pence in the year 2012. This is a positive indicator that the company investor can gain from their investment in the company.
Dividend Yield Ratio: the ratio defines the company’s dividend amount as a proportion of the price of its share. Whitbread PLC had a dividend ratio of 2.41 per cent in the last financial year that ended March 2012 (Whitbread, 2012). Although the ratio is low, the company’s dividend has been increasing in the recent years. This serves as an encouragement for investors to hold their stocks in the company speculatively.
Dividend Cover Ratio: the ratio is essential in expressing the ability of the company to pay investors ordinary dividends out of the profit made within a financial year. Whitbread managed to have dividend cover ratio of 2.96 as at March 2012. From this ratio, it is clear that the company can safely afford to pay dividends to its investors. This figure also shows the ability of the company to attract more investors since they will be sure of dividend payments from the company.
Earnings per share ratio: this ratio expresses the amount of profit that each share in issue is within a given financial year. Whitbread’s earning per share has increased greatly over the last five years. In the year 2008, the ratio stood at 50.92 pence. This figure has tripled over the past five years to stand at 151 pence as at March 2012. This represents a 197.6 per cent increase in the ratio from the year 2008 to the year 2012 (Whitbread, 2012). This trend presents a brighter future for Whitbread PLC. This is because the investors will remain confident about the company’s ability to pay dividends. This positive ratio is also of great importance in encouraging more investment in the company by the current investors and potential investors. The earnings per share ratio also serve to boost investor confidence in the management of the company. This will lead to improved performance of the company in the future. However, this ratio is based on historical earnings and cannot be entirely used in the prediction of future company growth. Furthermore, this ratio ignores the effect of inflation on the general share prices.
Price Earnings Ratio: the ratio compares the company’s current market price of its share with the earnings per share of the company. It helps the investors to predict whether they can anticipate higher earnings in the future or not. Whitbread PLC has been dwindling in the last three years due to the recession that affected stock market across the world. In the year 2008, the price earnings ratio was valued at 16.60 million pounds and has since dropped by 20.5 per cent to as low as 13.20 as at March 2012 (Whitbread, 2012). The ratio cannot be entirely relied upon since it does not factor the causes of the fall in stock values of the company. The drop in market prices of the shares could be due to many factors such as inflation, recession, mismanagement, loses of customers, general industry weaknesses, or insider share trading.
Although financial ratios provide key information regarding the management and performance of companies, they cannot be completely dependable when making an investment decision. Ratios are important in the identification of weak and strong areas of the company. However, they do not identify the cause of the problem that is affecting the financial performance of the company. Moreover, different methodologies may be used by different companies just for the sake of comparison. Therefore, the ratios tend not to bring out the hard facts about the company’s performance indicators.
Share valuation is the calculation of value of company stocks in financial markets. The main purpose of share valuation is to provide information about future prices so that an investor can make a decision of buying, holding, or selling stocks. For valuation of shares, different methods can be used. The choice of the method of calculating the share value depends on the company and different regulations. In this analysis, two widely used methods have been used. These are Net Assets Value Per Share (NAV PS) and Dividend Per Share Growth (DPS G). The calculations based on these methods are as shown below:
It should be noted that, in this case, Fund assets minus fund liability is equal to total owner equity. From the Whitbread financial statements, the Net Assets value can be calculated as follows:
Whitbread Net Asset Value is 871 million pounds. This represents an ideal situation for the market price for shares of Whitbread in the future. The Redmanye Bentley Stock Brokers (2012) noted that the dividend per share growth of has increased from a two per cent in 2009 to 15 per cent in 2012. The positive trend in growth of dividend per share for Whitbread presents a stable and predictable growth.
Dividend per Share growth can also be used to evaluate share value. Dividend growth rate is calculated as dividend per share difference of two years divided by the previous year’s dividend per share ratio. The calculations are shown below:
DPS Growth Rate: =Current year’s DPS – previous year’s DPS X100
Previous year’s DPD
DPS Growth Rate =55.25 – 44.5 X100
The recent growth in Whitbread provides enough indicators that all is well for the company. Its share value has continuously increased after a major drop in the year 2009. This scenario presents varied decisions that can be taken by investors who could be considering holding, selling or buying the company shares. Basing on the dividend per share growth percentage, it shows that the Whitbread stocks are slightly undervalued in the market. This presents two scenarios about the company. In this regard, Whitbread is either facing hard times or future dividend may not be as high as present. However, from the financial ratio, it is evident that Whitbread performance is attractive, and the business is stable and has a predictable growth in the future. In conclusion, it is recommended that investors should consider buying Whitbread shares basing on the concrete findings about the company’s financial performance. Most of the financial ratios analysed reveal that the company has strategically been able to turn around its performance despite the volatile economic situation in the Euro Zone. The share value is slightly undervalued, and this is understandable because the whole hospitality industry has been affected.
Bass, B M & Riggio, R E 2005, Transformational Leadership, Rutledge, London
British Hospitality Association 2012a, Hotel Investment Volumes Continue to Grow, viewed 17 August 2012. http://www.hotel-industry.co.uk/2012/07/uk-hotel-investment-volumes-continue-to-grow/
British Hospitality Association 2012b, Future Uncertain for UK Hotel Industry, V viewed 17 August 2012. http://www.hotel-industry.co.uk/2011/10/uk-hotel-industry-uncertain/
Bull, R 2008, Financial ratios: How to use financial ratios to maximise value and success for your business, CIMA, Oxford.
Investors Chronicle 2012, Whitbread impresses, viewed 17 August 2012. http://www.investorschronicle.co.uk/2012/06/22/tips-and-ideas/share-tips/brokers-tips/whitbread-impresses-ada5q7dLaeCFirtaNkmecP/article.html;jsessionid=3CB3CF3E11EB10D959DFB5B91A6FF36F.mps-apr-01-8109
Redmanye Bentley Stockbrokers, 2012, Whitbread, Redmanye Bentley Stockbrokers, viewed 17 August 2012. http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=WTB
Ridder, K 2012, Whitbread plc (WTB: London), viewed 17 August 2012. http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=WTB:LN
Whitbread Website 2012, Whitbread, viewed 17 August 2012. http://www.whitbread.co.uk/whitbread/aboutus/ataglance.html
Name of Ratio
Return on Equity
Profit after Tax
£267.3 = 20.94%
£223 = 18.81%
£161 = 14.54%
£91.8 = 8.14%
£557 = 42.3%
Return on Capital
Pre-tax profit/Total Assets-Creditors short term
134 ÷ (2417.0-657.8)
Dividend per Share
Dividends ÷ Number of shares
Current Assets ÷ Current Liabilities
148.4 ÷ 368.2
140.9 ÷ 331.5
132 ÷ 358
128 ÷ 293
183.2 ÷ 657
Price Earnings Ratio
Stock price ÷ Earnings per share
Dividend Cover Ratio
Earnings per share÷ Dividend per Share
Dividend Yield Ratio
Dividend per share ÷ stocks price per Share
44.5 ÷ 17.11
38.00 ÷ 14.62
36.55 ÷ 7.46
36 ÷ 13.33
Earnings per share ratio
Net profit-Dividend preferred on stocks ÷ number of shares
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