Closures push Whitbread into half-year loss

It comes as no surprise that Whitbread’s (WTB) sales sit at less than a quarter of their level at the 2019 half-year mark. The majority of its sites were closed for a large part of the period under review. The owner of Premier Inn flagged the extent of its turnover decline in a September trading update, preparing the market for interim results that would spell out the destructive impact of coronavirus restrictions and changing travel habits upon the hotel industry. Whitbread isn’t providing long term guidance, but it expects the UK’s new tiered approach to Covid-19 to play a part in a further drop-off in bookings across November and December.

The pandemic continues to punish rivals in the travel and hospitality sectors, whose businesses are exposed to the commercial disruption to varying degrees. InterContinental Hotels Group (IHG) signalled last week that its third quarter revenues per available room (RevPAR) had slumped by more than a half, while International Consolidated Airlines Group (IAG) does not expect its capacity for its final quarter to exceed 30 per cent of last year’s level. 

A new report from PwC today predicted that it was unlikely that UK hotel occupancy and RevPAR would return to last year’s levels before 2023, suggesting that London would sustain heavier damage than regional hotels. The report predicts that UK hotel occupancy rates next year will sit at around 55 per cent.

Whitbread management may not receive this gloomy outlook with as much trepidation as the more London-dominated hotel groups. Of its UK hotels, around four-fifths are based outside London. Its occupancy levels in tourist and seaside locations sat near 80 per cent in August, compared to an average of 51 per cent across the UK as a whole. The government’s Eat Out to Help Out scheme also spurred restaurant activity in August, with accommodation, food and beverage sales down 39 per cent against 2019, compared with 82 per cent in the previous month.

The composition of Whitbread’s asset portfolio also helped to limit its cash burn, which at £462m was better than earlier guidance of £625m to £640m from Morgan Stanley analysts. The majority of its UK hotels are also currently freehold sites, which means that it can operate at very low occupancy rates and still contribute to the overall business, helping to limit its cash outflow. 

The proportion of Whitbread’s UK freehold sites is nevertheless expected to come down from 61 per cent to 55 per cent when its pipeline of new rooms is delivered. Whitbread has almost 13,000 new UK Premier Inn rooms in prospect for the first half of 2021.

The company also has a burgeoning pipeline in Germany, which currently stands at just over 10,000 rooms. Whitbread aims to have more than 60,000 rooms in the long run, in a market that is dominated by independent hoteliers, who have 72 per cent share. The company disclosed the signing of up to 15 new German hotels in its results announcement. 

While Whitbread is touting long-term opportunity in Germany, its new hunting ground was a source of considerable pain during its first half. The company recorded £340m in write-downs linked to German assets in response to the pandemic, which was a considerable factor in driving Whitbread into an overall loss-making position for the period.

Whitbread ended the period in a net cash position of £196m, if you exclude £2.96bn in lease liabilities. The balance sheet was strengthened by £981m from a rights issue during the period, while Whitbread has more firepower in reserve, having yet to make use of its £600m government Covid Corporate Financing Facility.

The company is confident that it can steal market share from independent hotel businesses, with independent UK market share having fallen 9 percentage points over the last decade to just under half of the market. They will lack the flexibility with banking partners and landlords that is more likely to be afforded to listed players like Whitbread. The company’s own base scenario expects a recovery throughout next year that will fall short of 2020’s performance, but it says that it can meet its funding obligations under more severe conditions in which the market is ravaged by a national lockdown or more local restrictions.

This all makes perfect sense, while a trend towards more holidaying in the UK will likely play to Whitbread’s regional bias. But while last month’s update helped to avert any share price volatility following the release of its results, it’s entirely plausible that Whitbread investors will remain on a rollercoaster as restrictions change and business travel remains constrained by new working patterns. Sell.

Peel Hunt analysts forecast full-year 2021 adjusted pre-tax losses and losses per share of £511.9m and 221.8p respectively, before pre-tax profits and EPS of £157.6m and 64.8p in 2022.

Last IC view: Sell at 2,334.00 on 07 Jul 2020