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Whitbread - revenue below expectations

William Ryder, Equity Analyst | 27 April 2021 | A A A
Whitbread - revenue below expectations

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Whitbread plc Ordinary 76 122/153p

Sell: 2,475.00 | Buy: 2,477.00 | Change -35.00 (-1.39%)
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Covid restrictions throughout the year saw Whitbread's revenue fall 71.5% to £589.5m, below analyst expectations. The top line decline fed into a £635m underlying loss.

At present, 92% of UK hotels are currently operational and management's expecting strong summer demand in coastal towns, which represent roughly 15% of the group's portfolio.

In the year ahead, profits are expected to rise by £16.5m for every 1% uptick in sales. The group will need its hotels to be 55% occupied in order to break-even.

The shares fell 2.4% following the announcement.

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Our view

As the owner and operator of the Premier Inn hotel chain, the past year's stay-at-home orders significantly hurt Whitbread. Even while the group's hotels and restaurants were open, occupancy was well below historic levels.

The past year's losses were no surprise. We're hopefully exiting the low point for European travel for a generation.

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.

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

Management's done 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. The leaner cost-base means the group needs 55% occupancy levels in order to break even, but even that low bar could be hard to clear.

Pent-up demand is expected to unleash a staycation boom in the UK this summer, which will benefit primarily around 15% of Whitbread's portfolio. We got a preview of what summer staycation demand looks like when restrictions were lifted last year, and it was barely enough to cover costs. Occupancy was 51% in August and 58% in September. Ultimately the group needs sporting events, weddings and business travel to resume in earnest before a recovery will be on the cards.

Between the £1bn June rights issue and £550m worth of Green Bonds issued in February, the group's got significant breathing room to wait it out as long as demand starts to normalise in the year ahead.

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 1.42, 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/Book ratio: 1.42
  • 10 year average Price/Book ratio: 2.49
  • Prospective yield: 0.2%

All ratios 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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Full Year Results

Covid restrictions for most of the year meant revenue for the Premier Inn UK was down 71.8% to £577.4m as overall occupancy fell to 29.4% (2019:76.3%). That translated to a £532.8m underlying loss. Between August and February, the division saw consistent market share gains with the Premier Inn controlling 14.7% of the UK market as of February, a 6.9 percentage point increase on last year.

Revenue for Premier Inn Germany was 2.5% lower at £11.5m as Covid-related disruptions outweighed the group's substantial expansion. The number of available rooms rose 349.8% to 4,880 as the group increased its footprint from six to 19 hotels. That meant operating costs increased by £20m. The division reported an underlying loss of £44.9m, which is expected to deepen in FY22 and continuing in FY23.

At year end Whitbread had access to £1.3bn in cash, the result of its £1bn June rights issue and £550m worth of Green Bonds issued in February. The group also had access to $950m worth of untapped credit. As a result, Whitbread's net debt position declined from £322.9m to £46.5m.

Customer deposit refunds were the primary reason for a £99.8m working capital outflow, though some of that was recouped by new booking deposits. Free cash flow was -£605.9m, compared to -£126.6m in 2019.

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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.