Whitbread plc (WTB) Ordinary 76 122/153p Shares
HL comment (24 March 2020)
Following instructions given by the Prime Minister on 23 March, Whitbread is closing all of its hotels in the UK. Hotels in Germany will also close. The possible exception to these closures are those near hospitals that may be needed for key workers.
All the group's pubs and restaurants have been closed since 20 March.
The group has implemented a range of cash saving measures, including the decision not to declare a dividend for the full year.
The shares were up 2.8% following the announcement.
After starting out in brewing and pubs way back in 1742, Whitbread has reinvented itself more times than David Bowie. But despite Whitbread 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 have 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 for 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. In Whitbread's case, this means that for every 1% increase in revenue per available room (RevPAR), profit before tax is expected to increase by £12m-£15m. This is great during the good times, but a nightmare when conditions sour. This is the problem Whitbread faces now.
Management is doing everything they reasonably (and in some cases legally) can to reduce cash spending. The measures certainly sound extensive, particularly if they can furlough the majority of the workforce and have the taxpayer pick up the bill. We don't know whether they'll be enough because we don't know how long current restrictions will last, or how quickly travel patterns will return to normal.
It's fortunate that most of Whitbread's hotels are owned rather than leased. That means the group's rent payments are lower than they would otherwise be, although they are still substantial. A sizeable property portfolio means the company can shoulder significant quantities of debt, and it is. At its half year results in October 2019, the group reported debts (including lease obligations) of 2.3 times adjusted operating cash flows.
Prior to today's update the shares changed hands for 11 times expected earnings. However, we think investors should exercise caution when using valuation multiples at the moment. Analysts' expectations are changing almost daily.
Whitbread faces a real challenge now, and management is clearly grateful for the taxpayer's largess. Whether state aid and the cost cutting program will be enough remains to be seen. Provided conditions return to normal relatively soon, we think the group will make it out of the woods. However, a prolonged shutdown may be too much for the group to manage, we will just have to wait and see.
Whitbread confirmed its financial performance for the full year ending 27 February 2020 was in line with expectations. However, in recent weeks trading has been "materially adversely impacted by COVID-19".
Whitbread is in talks with the government about keeping some hotels open for key workers, but no agreement has yet been announced.
In order to preserve cash, management has decided to: suspend all discretionary spending such as refurbishments, non-essential training, hiring and new investment; furlough a "significant" number of staff members, for whom the government is expected to cover up to 80% of salaries; cancel all repairs and maintenance unless required for health and safety or by law; cancel all capital spending unless contractually obligated; suspend the dividend.
The details of these proposals will be released with full year results, which are due towards the end of April.
Whitbread welcomes the business rates holiday, which will save the group around £120m.
The group warned that closing its hotels may constitute a technical default on its obligations to creditors. Management is in discussions with relevant parties to seek waivers where possible.
Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Whitbread.
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