Whitbread shows signs of recovery

Hospitality group Whitbread (WTB) has had a brutal pandemic. With hotels stripped of customers by government diktat and restaurants left empty, a £1bn loss for fiscal year 2021 wasn’t a surprise. The good news is that the half-year results show signs of recovery for the owner of Premier Inn, Britain’s largest hotel brand. Expansion plans also look promising, with enticing long-term prospects in the German market.

Dates defined the group’s fortunes in the period. On 17 May, government regulations once again permitted overnight leisure stays in hotels rather than restricting hotels to essential business guests. The further easing of restrictions on 19 July helped boost summer trading. Occupancy rates predictably shot up, with 61 per cent occupancy at UK Premier Inns against the disastrous 20 per cent comparative.

The situation has improved since. In the seven weeks to 14 October, the occupancy rate was at 81 per cent. However, management is wary. The fourth-quarter trading period is generally quieter. VAT on hospitality products and services has now increased to 12.5 per cent, which could stymie the average room rate. While “market-wide supply chain issues and a tighter labour supply” is being fought with a £100m efficiency programme, wider economic factors will undoubtedly have a deleterious impact on the business.

The group has continued its expansion into the German market. The open and committed hotel pipeline now stands at 73 hotels, up from just six at the end of fiscal year 2020. German revenues of £11m were up 197 per cent against last year. Admittedly, this is a minuscule facet of total sales, but management is seeking rapid growth in the market and plans for further penetration could see this part of the business looking very different in the next couple of years.

Income investors should look away now. Dividend payments are prohibited by covenant waiver conditions until 2023. However, this has helped the cash position, which was up 22 per cent to £1.1bn at the period-end.

Peel Hunt forecasts full-year losses of £226m and negative EPS of 95p. The broker expects a return to profit in fiscal year 2023, predicting profit before tax of £116m and EPS of 39p. While there has been progress made in the period, helped by Premier Inn’s extremely strong brand equity, uncertainty remains around a potential return of restrictions and a quiet winter trading period ahead. It is wise to be cautious for now. Hold.

Last IC view: Buy, 3,267p, 27 Apr 2021