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Whitbread - new restrictions bite

Nicholas Hyett, Equity Analyst | 14 January 2021 | A A A
Whitbread - new restrictions bite

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Whitbread plc Ordinary 76 122/153p

Sell: 3,113.00 | Buy: 3,115.00 | Change -60.00 (-1.89%)
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Whitbread's total sales fell 54.3% in its third quarter, reflecting the impact of ongoing government restrictions on hotels and restaurants. The group's cash outflow was in line with previous guidance..

In the five weeks ending 31 December, after the end of the quarter, sales fell 73.3% as restrictions tightened. Around two thirds of hotels are open and all restaurants are shut.

The shares were broadly flat 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 have kept substantial parts of Whitbread's estate closed for much of the year. Even while the group's hotels and restaurants were open occupancy has been well below historic levels.

To be honest that's no surprise. 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 have been imposed. Late summer was an important breather for the group, but seaside staycations are no substitute for international and business travellers visiting the UK's major cities.

Hotel running costs are pretty much 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 a substantial number of 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 £1.0bn cash and provides the group with significant breathing room. That could get absorbed just keeping the group's head above water though, and expansion plans in Germany continue to require investment.

We also note that Premier Inn is the market leader in budget hotels in the UK. Current conditions may force smaller competitors out of the market, leaving it with a potential competitive advantage when the dust settles - a trend already reflected in the group's growing market share.

If this is sustained Whitbread could offer an attractive opportunity. The shares trade on a price to book ratio of 1.3, which is a substantial discount to the ten year average. However, the group faces serious risks, especially concerning the return of business travel, so the shares should be handled with caution.

Whitbread key facts

  • Price/Earnings ratio: 1.3
  • 10 year average Price/Book ratio: 2.0
  • Prospective yield: 0.0%

All figures are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Q3 Trading Update

Third quarter UK sales were down 54.7%. This reflects a 55.2% fall in accommodation sales and a 53.9% fall in food & beverage sales. Occupancy was at 58% in September, 52% in October, but 35% in November. Whitbread's share of the total hotel market rose 4.1 percentage points to 11.4%. On average 82% of restaurants were open during the quarter.

The German estate had 23 operational hotels, compared with five at the same point last year. In September sales were up 58%, but fell 2.3% for the quarter as a whole as more onerous restrictions were introduced in October and November. Since the end of the quarter Whitbread has bought 13 hotels from Centro Group, bringing the total open estate to 29 hotels, with an open and committed pipeline of 68. Losses in the division are expected to continue into the 2023 financial year.

As of 31 December the group had £40.0m in net cash on the balance sheet, compared with £196.4m at the end of the first half. The group held £814.9m in cash and has access to up to £1.2bn in credit. Capital spending totalled £98.4m in the half.

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.