ii view: Whitbread expands its German hotels empire

Covid has meant losses, but this could be a good time to snap up other smaller distressed hoteliers.

First-half results to 27 August

• Revenue down 77% to £251 million
• Adjusted pre-tax loss of £367 million, down from a profit of £235 million
• No dividend payment
• Net cash of £196 million, up from net debt of £77 million

Chief executive Alison Brittain said:

"Our performance following the reopening of our hotels and restaurants in the summer was encouraging and we continue to trade ahead of the market. Taking market share in the UK demonstrates the strength of our trusted Premier Inn brand and the benefits of our unique operating model.

"We hold a uniquely advantaged position in the UK market as the largest player with the strongest brand.  Our financial flexibility and resilience, combined with a strong balance sheet, give us the ability and the confidence to invest with discipline and focus on strong long-term returns.”

ii round-up:

Hotel and restaurant owner Whitbread (LSE:WTB) reported a first-half loss marginally below City expectations amid hotel closures during the pandemic lockdowns. However, the company has moved to expand its fledgling German outlets as Covid created buying opportunities.

A loss of £367 million proved below analyst forecasts, but was softened by news of an acquisition in Germany of up to 15 hotels from a pandemic stressed operator. It now has a pipeline of 10,000 open or due to open rooms across 53 hotels in the country, of which 19 were open at the end of the first half. German room numbers equate to a market share of around 1% compared to its current 11% UK market share. 

Whitbread shares were little changed in UK trading having nearly halved year-to-date. Shares for franchised fee-based operator and owner of the Holiday Inn brand InterContinental Hotels (LSE:IHG) have fallen by around a quarter in 2020.

In the UK, Whitbread operates over 1,200 Premier Inn hotels and restaurants. UK occupancy rates increased from 51% in August to 58% in September, outpacing the recovery for midscale operators according to management. However, rates in October have slowed following a retightening of virus restrictions and local lockdowns. 

The UK government’s Eat Out to Help Out scheme helped boost August sales at its eateries including Beefeater and Brewers Fayre.  

Cash burn in the period totalled £462 million, better than prior management forecasts of up to £640 million. Net cash stood at £196 million at the period end, aided by June's £1 billion shareholder fundraising.

ii view:

Premier Inn operates a direct digital distribution model. It gives complete ownership of the customer relationship, driving significantly lower acquisition and retention costs. Many other brands pay high commission rates to third parties such as online travel agents. The same focus on costs remains across its operations. Given the pandemic, it recently entered a consultation process that could result in up to 6,000 redundancies in the UK.

For investors, the potential to replicate UK growth in Germany offers enticing long-term prospects. Action to reduce costs, including scrapping the dividend and cuts to head office, plus the £1 billion bolstering of its balance sheet was sensible. But with government pandemic measures now retightening, a lack of overseas tourists at its London hotels, and little sign of any return to dividend payments, there appears little need to rush in just yet.

Positives: 

• Continuing to cut costs
• Balance sheet previously boosted by £1 billion 

Negatives:

• Covid hit first half total sales down 76.8%
• Lacks the geographical diversity of other hotel operators

The average rating of stock market analysts:

Hold