ii view: Premier Inn owner Whitbread enjoys seaside revival

Its shares are down over 40% in 2020, but can bucket & spade outlets compensate for London rout?

First-quarter trading update to 28 May 2020

• Total sales down 79.4%
• Completion of a £1 billion fund raising or rights issue

Chief executive Alison Brittain said:

"We are very pleased to have commenced the reopening of our hotel and restaurant estates, which are now able to welcome all business and leisure guests. 

"It is still very early days and therefore too early to draw any conclusions from our booking trajectory, especially as there has been volatility in hotel performance in other countries that relaxed controls before the UK. However, in traditional regional tourist destinations, we are seeing good demand for the summer months, whilst the rest of the regions and metropolitan areas, including London, remain subdued.

"The successful completion of the £1 billion rights issue on 10 June will enable us to maintain our competitive advantage and financial flexibility, as we have both strengthened our balance sheet and secured the business so it can withstand a long period of low revenues. Our strong balance sheet, alongside both our leading operating model and the power of our brands, means that we are in the best possible position to take advantage of enhanced structural opportunities that we expect to become available in both the UK and Germany.  This will mean that we are in a position of strength to continue to invest, increase market share, and over-time create significant value for shareholders."

ii round-up:

Premier Inn owner Whitbread (LSE:WTB) today posted a near-80% drop in first-quarter sales due to the Covid-19 pandemic. 

More than 270 of its UK hotels and all of its 19 operational German hotels have now reopened, with most the remaining outlets expected to be back open by the end of July.

Whitbread shares were down by more than 3% in afternoon trading and have fallen by over 40% year-to-date. Shares of rival international hotel operator InterContinental Hotels (LSE:IHG) are down by just over a quarter in 2020. 

Good summer demand for traditional tourist Premier Inn destinations was being offset by subdued demand elsewhere. 

Whitbread operates over 1,200 Premier Inn hotels and restaurants across the UK, along with restaurant brands including Beefeater and Brewers Fayre. It is planning to expand its German hotel network to over 30. 

It previously scrapped last year’s final dividend payment as the pandemic hit and then went on to raise £1 billion in order to both strengthen its balance sheet and give added flexibility. 

First-half results are currently scheduled for 27 October. 
ii view:

Whitbread previously owned Costa Coffee. Its sale enabled Whitbread to return significant value to shareholders. However, the price for extracting this value is arguably reduced business diversity, with the company now a major play on the cyclical hotel market. 

That said, both hotels and coffee shops have been closed by the pandemic. Geographical diversity is slowly improving as the company expands in Germany, while its balance sheet has also been bolstered by a £1 billion fund raising. 

For investors, the reopening of outlets is clearly positive, and fortified finances offer some reassurance. But the closure of its business under the pandemic will hit earnings. The scrapping of last year’s final dividend payment, although sensible, blunts shareholder returns, while the group’s former jewel, its London hotels, are now suffering as international tourism dries up. For now, this relatively short update injects little new confidence, with a wait and see approach arguably most sensible.  

Positives: 

• Cost saving programme
• Looking to build the number one budget brand in Germany

Negatives:

• Covid hit first quarter sales down 79.4%
• Lacks the geographical diversity of other hotel operators

The average rating of stock market analysts:

Hold