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Whitbread feeling the Brexit effect

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Premier Inn owner Whitbread today posted a drop in pre-tax profits, as Brexit uncertainty continues to weaken confidence in the business and leisure sectors.

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Whitbread, whose main brand is now the Premier Inn hotel chain after selling its Costa business to Coca-Cola last year, reported a 4.1% fall in profits before tax to £236m in the first six months of the fiscal year compared with £246m a year earlier. Revenues for the group came in level with last year at £1.1bn.

Acknowledging headwinds for the sector, chief executive Alison Brittain said: “We have delivered a resilient first-half profit performance despite challenging market conditions in the UK. Shorter-term trading conditions in the UK regional market have been difficult, particularly in the business segment where we have a higher proportion of our revenue, whilst trading in London remained strong.”

Business stays are an integral part of the Premier Inn model, especially in the brand’s regional outposts, so companies tightening their belts ahead of Brexit isn’t what Whitbread needs. What’s more, if recession fears rise, business travel and advertising costs will be among the first cutbacks for many firms, with clear implications for a company hitching its cart to the hotel sector, now that its coffee chain is gone.

With this in mind, Whitbread has been working hard to raise its profile beyond British borders. Brittain said: “Our German pipeline has increased 25 per cent to 7,280 rooms over the last year and we continue to look for ways to accelerate our ambitions. Whilst the near-term market conditions in the UK remain uncertain, we have confidence in the long-term structural opportunities available in the domestic budget travel markets in the UK and Germany.”

Post-caffeine crash?

Shareholders wholeheartedly welcomed the sale of Costa to Coca-Cola last year and with a price tag of £3.9bn (having acquired the business for £19m in 1995) it would be hard to say it wasn’t the right choice.

However, it has left Whitbread with a much less diversified portfolio of businesses as a result. Smaller brands like Brewers Fayre and Beefeater are still UK-focused and rely heavily on consumers looking for a mid range roast. Once the purse strings are tightened, there is a danger that a few too many parts of the whole company will feel the hit. Of course, the same could be said for a coffee chain based upon discretionary spending, but with nearly 4,000 outlets worldwide and over 8,000 self-service machines, it at least has the presence to attract smaller impulse purchases.

That said, the sale did allow Whitbread the capital to pay down debt, bolster its pension fund and put money behind the Premier Inn business, as well as return money to shareholders.

Now that the market has factored the proceeds into the current state of the company, shareholders will be hoping expansion into Germany is the geographic diversification the firm needs, if not the broader sector footprint it had previously.

For the rest of us, there’s a clear lesson here on readying our portfolios before any market volatility hits. It’s important to have a portfolio set up to deal with whatever happens.

We often talk about holding a range of funds with assets that behave differently from each other - the difficulty can be in actually choosing a selection to suit you, and feeling confident that you’ve done the right thing.

Funds like the Fidelity Select 50 Balanced Fund take the guesswork out of it all. Manager Ayesha Akbar populates the portfolio with funds our analysts rate highly, and looks to get a blend that aims for growth, with an eye on preserving capital as well. She pays attention to making sure assets are uncorrelated, and can pass the baton between themselves so parts of the portfolio are performing at any one time.

Hear from Ayesha Akbar in the video below.

https://video.fidelity.tv/view/hlBtHKHXMVL

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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