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Whitbread - still loss making, but in line with expectations

Sophie Lund-Yates, Equity Analyst | 27 October 2020 | A A A
Whitbread - still loss making, but in line with expectations

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Whitbread plc Ordinary 76 122/153p

Sell: 3,327.00 | Buy: 3,329.00 | Change -7.00 (-0.21%)
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Underlying revenue fell 76.8% to £250.5m in the first half, reflecting hotel closures earlier in the year. Underlying operating losses were £295.1m, compared to profit of £296.4m last year.

The group said performance had been in line with expectations, and occupancy trends had started to recover in summer and into September. However, this has begun to taper off since new regional lockdowns were introduced in the UK in October, and the ongoing developments make the near-term outlook difficult to predict.

The dividend won't be paid until at least March 2022, as part of the terms agreed with lenders who have temporarily relaxed some of their rules to help Whitbread.

The shares rose 1.3% following the announcement.

View the latest Whitbread share price and how to deal

Our view

As the owner and operator of the Premier Inn hotel chain, lockdowns meant Whitbread was closed for most of its first half. And while the group's hotels and restaurants are open again - with a marked boost to performance from staycations and the 'Eat Out to Help Out' scheme - it's set to be a long road to recovery.

We're in what's likely to be the low point for European travel for a generation, and conditions are getting even worse in the short term as new lockdowns are announced. August was an important breather for the group, but seaside staycations are no substitute for international and businesses travellers visiting the UK's major cities. And with working from home looking like it's here to stay, the return of business travellers has been thrown into doubt.

When it comes to owning and operating hotels, running costs are pretty fixed regardless of how many guests show up. Once costs are covered, each additional guest is almost pure profit. This is great during the good times, but a nightmare when conditions sour. Without the ability to flex the cost base losses quickly mount.

Without full hotels the group isn't profitable, so a lower and more flexible cost base is essential. Management's doing everything they reasonably can to reduce costs, including 6,000 redundancies - a reflection of the fact coronavirus may have changed Whitbread's world for good.

Owning its hotels, rather than leasing them, helps as the group's rent payments are lower than they would otherwise be. Having said that a sizeable property portfolio means the company is shouldering a significant quantity of debt.

Whitbread's June rights issue raised a further £1.0bn cash and provides the group with significant breathing room. That could get absorbed just keeping the group's head above water although, as expansion plans in Germany continues at pace, some of this is to be allocated to opportunities.

We also note that Premier Inn is the market leader in budget hotels in the UK. And current conditions are likely to stamp out smaller competitors, leaving it with a potential competitive advantage when the dust settles.

If this comes true, and travel does become a sustainable source of revenue once more, then Whitbread could offer an attractive opportunity. By some analyst estimations, the shares trade at a significant discount to the value of Whitbread's substantial real-estate portfolio (UK properties were valued at £5.8bn before the pandemic). And in total the shares trade on a price to book ratio of 1, which is less than half the ten year average.

We can't knock Premier Inn's valuable brand, market leading positon and ability to handle a crisis. But unfortunately knowing what the future holds is almost an impossible task. Should travel remain subdued in the face of evolving restrictions and ongoing infections, Whitbread will simply struggle to make any money. Deciding on whether or not the share price discount is justified depends on if, not when, travellers - both domestic and business - start checking in en masse once more.

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Half year results

Whitbread recognised a non-cash charge of £339.9m in the period, relating to the reassessment of the value of acquisitions in Germany triggered by the pandemic. Including this charge, pre-tax losses were £724.7m.

In the UK, occupancy levels improved on a weekly basis since reopening and averaged 51% in August and 58% in September, driven by tourist destinations. However this wasn't enough to offset overall declines, with accommodation and food & beverage sales falling 77.7% and 76.3% respectively. Lower occupancy and average room rate meant revenue per available room (RPAR) of £10.87 was a 78.3% decline compared to last year. This fed into a 77.2% fall in revenue to £245m.

As planned, operating costs fell 28.7% to £451.1m, largely as a result of lower costs of sales in food and beverage. This didn't mitigate the earlier hotel closures, and operating losses were £254.9, against profit of £318.2m last year.

2 new hotels opened in the half, and five were permanently closed. The total UK estate now stands at 817.

Whitbread continues to expand in Germany, and more than trebled its open hotel network to 21 since the start of the year. The total open and committed pipeline estate now stands at 53 hotels and over 10,000 rooms, and Whitbread has signed up to 15 leases for hotels currently run by Centro Hotel Group.

Within the half, revenue of £5.5m was 48.6% up on last year, reflecting the higher number of hotels in the estate (19 open hotels compared to 3). As a result, accommodation sales grew 66.3%, but food and beverage declined 12.0%. RPAR was down 72% at £10.83. Underlying operating losses rose from £5.8m to £23.7m.

Whitbread spent £121.1m on capital expenditure, which was in line with guidance and reflects the scrapping of non-essential spending. The group expects capital expenditure for the full year to be in the region of £250m, as previously guided. It also said "the acquisition of the 15 leasehold hotels in Germany will require around £40m of capital, of which 50% is the expected cost to refurbish each hotel."

The lower profits meant there was a cash outflow of £461.7m. The group has net cash of £196.m, but once lease related debt is included there's net debt of £2.8bn. The £1bn rights issue in June means within this Whitbread has access to £936.2m of cash and equivalents, and a further £1.6bn in undrawn credit and government funding.

Find out more about Whitbread shares including how to invest

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

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.