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Whitbread - full year flat, this year might be loss making

Emilie Stevens, Equity Analyst | 21 May 2020 | A A A
Whitbread - full year flat, this year might be loss making

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Whitbread plc Ordinary 76 122/153p

Sell: 2,492.00 | Buy: 2,496.00 | Change -35.00 (-1.37%)
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Additional rooms helped Whitbread's full year underlying revenue rise 0.7% to £2.1bn. However, higher costs largely reflecting the national living wage and energy costs, meant operating profits fell 9.5% to £487m.

However, most of Whitbread's estate has been closed since the end of March, in line with government coronavirus guidance. In the 11 weeks to 14 May, total accommodation and food and beverage revenues dropped 75%. In the last 7 weeks that's worsened to 99%.

As a result of the hit to earnings Whitbread said it might not make a profit this year.

Whitbread will raise £1bn through a rights issue and all debt lending agreements have been waived for 18 months. These measures add to the group's liquidity. Whitbread said it can last 'many months of hotels being closed or at low occupancy'.

The shares fell 13.2% following the announcement.

View the latest Whitbread share price and how to deal

Our view

After starting out in brewing and pubs way back in 1742, Whitbread has reinvented itself more times than David Bowie. But despite making it through both the Napoleonic and World Wars, COVID-19 may well rank among the biggest threats the group has ever faced.

After the sale of Costa Coffee, the group's focus is firmly on Premier Inn, which is a problem now they've all been forced to close.

Trading was already tough for the discount hotel chain, with fewer visitors despite lower prices. Business and social travel tends to fluctuate with the fortunes of the economy, and we wouldn't be surprised if this was the lowest point for European travel in a generation.

Whitbread's business has a high degree of operating leverage. Hotel running costs are pretty fixed regardless of how many guests show up. So, once your costs are covered, each additional guest is almost pure profit. This is great during the good times, but a nightmare when conditions sour.

Management is doing everything they reasonably can to reduce cash spending. The measures are extensive and include furloughing 27,000 members of staff.

Whitbread owning its hotels rather than leasing them also helps. It means the group's rent payments are lower than they would otherwise be, although they're still substantial. A sizeable property portfolio means the company can shoulder significant quantities of debt, and it is.

Going into the crisis net debt (including lease obligations) was 2.6 times operating cash flows. In normal times this wouldn't be an unmanageable level, nor is Whitbread's access to significant liquidity contingent on keeping debts down. However, with revenues wiped out for the foreseeable, leverage could quickly become unmanageable and finding extra debt funding a challenge.

Cue Whitbread's rights issue. The group's shoring up its balance sheet with a £1.0bn raise from shareholders. This means current shareholders will likely end up with a smaller piece of the profit pie as well as seeing the dividend cancelled this year. For a company that's managed to increase its pay-out almost every year since 2002, that's pretty big.

While Whitbread should have the financial power to weather the lockdown for some time yet, the longer current restrictions last the longer it will take the groups operation and finances to recover. There's also a rather large question over what life looks like for hotels even when lockdowns are lifted. Whether travellers will return in the same numbers as in the past only time will tell.

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Coronavirus update

Whitbread expects UK hotels to be closed or at low levels of occupancy until September 2020. In Germany, the group has tentatively reopened 16 hotels.

As a result of closures in the first half of this year, operating cash outflows of c.£80m per month are expected during the period of closure or low occupancy. However, in the first half Whitbread will see additional cash outflows of £100m from customer refunds and c.£130m capital expenditure on committed projects. These outflows will be partially offset by approximately £70m-85m of furlough benefits during the period to the end of August.

Whitbread has taken a number of actions to reduce costs which include: stopping all discretionary spending and capital expenditure, furloughing 27,000 employees, voluntary pay cuts by the board and senior managers and not paying a dividend this year - future dividends are dependent on COVID-19.

Whitbread previously guided that a 1% fall in revenue per available room (RevPAR) would lead to a £12 - 15m hit to profits. However, it now expects the impact to be more like £18m once restaurants are included.

At the start of March Whitbread had £503m in cash and undrawn credit of £950m. The group is also eligible to borrow from the UK Government's Covid Corporate Financing Facility if needed.

Whitbread plans to raise a further £1bn in cash through a rights issue. The group will issue one new share for every two existing shares at a price of £15, a discount of 47.2% to yesterday's closing price.

Full Year Update

Whitbread said additional capacity and a better second half, particularly in the fourth quarter where sales were ahead of the market, contributed to its revenue increase.

In the UK, revenue per available room fell 4.3% in the year to £46.91. That reflects a decline in occupancy levels and average room rate, despite an increase in Whitbread's overall estate.

Whitbread said Brexit led to a weak UK market and Premier Inn's performance was impacted more than the wider market due to its regional presence and proportion of domestic and business customers. However, the London market continued to perform strongly and Premier Inn outperformed the market here in the second half.

These conditions with higher costs, saw profits decline and also contributed to a decline in cash generated by the group. Funds from operations dropped from £902m to £706m in the year.

Following the distribution of Costa Coffee sales proceeds to shareholders and higher capital expenditure, Whitbread's finished the year with net debt of £323m.

Whitbread accelerated its Premier Inn expansion in Germany, where the number of open hotels now stands at 16 with a further 36 committed. This includes the group's acquisition of Foremost Hospitality Group on 28 February 2020 - which owned 13 hotels. Whitbread said it's seeing good levels of occupancy so far.

Premier Inn has a 49% share in a joint venture with Emirates in the Middle East, 2 new hotels were opened during the year, bringing the total to 10 hotels. Losses from this partnership amounted to £1m, in-line with the prior year.

Find out more about Whitbread shares including how to invest

Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Whitbread.

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