Whitbread (LSE: WTB) shares are currently trading over 10% below their recent highs. I view this as a great opportunity to buy into the owner of the UK’s biggest budget hotel brand, Premier Inn.
I also see great value on offer for investors checking-in to Elegant Hotels Group (LSE: EHG), the owner and operator of seven luxury hotels in Barbados.
Short-term headwinds
The Whitbread share price was comfortably above 5,000p little more than a month ago, but is currently nearer 4,500p. In its annual results, released at the end of last month, the company reported a decline in business and leisure confidence in the last quarter of its financial year ended 28 February, leading to weaker domestic hotel demand.
It further said: “This weakness has increased into March and April particularly in the regional business market, coinciding with an acute period of political and economic uncertainty in the UK.”
Compelling long-term growth story
Despite the short-term market challenges, it’s the long-term growth story for the Premier Inn business that I find compelling. There’s still plenty of expansion to come in the UK, and the company is accelerating its plans to replicate the domestic, multi-decade success story in Germany. This has been helped by the £3.9bn sale of its Costa Coffee business to The Coca-Cola Company earlier this year.
The main reason I’d be happy to buy Whitbread’s shares today (on 19 times forward earnings with a 2.1% dividend yield) is the prospect of strong, multi-decade earnings and dividend growth. However, there are also possibilities of more immediate returns. City analysts reckon Whitbread’s current valuation makes it attractive for a takeover bid, while activist investor Elliott Advisors is reportedly agitating for the company to unlock value from its £5.8bn property portfolio.
Eye-catchingly cheap
Over in Barbados, Elegant Hotels reported a solid performance in its half-year results today — despite a competitive market — with a 5% increase in underlying profit before tax on 3% higher revenue. Management said it has good visibility of bookings for the remainder of the year, and is comfortable with current market expectations.
The stock trades at an eye-catchingly cheap 7.5 times forward earnings at a share price of 71.5p (up 3.6% on the back of today’s results). A prospective 4.7% dividend yield also spells value, as does the company’s freehold-property-backed implied net asset value of 156p a share.
Well-backed business
Despite it being a smaller company — its market capitalisation is £63.5m — I find it hard to understand why the stock is trading at such a cheap valuation.
Renowned entrepreneur Luke Johnson is a non-executive director and 12.5% shareholder (albeit his Midas-touch reputation has been somewhat tarnished by the recent collapse of Patisserie Valerie’s parent company). And Elegant’s shareholder register is also packed with blue-chip institutional names, including the asset management arms of Schroders and Close Brothers.
Looking to the future
The company plans to expand in a measured manner, both on Barbados and further into the Caribbean, whilst ensuring its balance sheet remains robust. With its cheap valuation, nice dividend, and growth prospects, I rate the stock a ‘buy’. Indeed, I think it has potential to be a long-term big winner for investors today.
