Few expected it, but the hotelier has good reason to raise cash right now, reports our head of markets.
The announcement of a surprise rights issue alongside today’s annual results has wrongfooted investors, as Whitbread (LSE:WTB) looks to shore up its financial position.
The usually negative statements of either a profit warning or a cancellation of the dividend have become almost de rigueur during the current crisis, and have been largely accepted by investors, but a rights issue is rather different.
Traditionally seen as a call for financial help in a distressed situation, the additional surprise in Whitbread’s case is that there had been no obvious signs. A strong balance sheet, underpinned by a large property portfolio, is in addition to around £500 million of cash and access to credit of £950 million.
New shares issued via the 1 for 2 fully underwritten rights issue, which is set to raise around £980 million for Whitbread after costs, will begin trading fully paid on 10 June.
Despite the company estimating cash outflows of £600 million in the new financial year, including £80 million per month as the result of hotels either remaining closed or with low occupancy, a number of actions have been taken to mitigate the effect.
A reduction in capital expenditure, the suspension of the dividend and a boost from the Government in terms of business rates relief and other financing facilities, may well have been sufficient to see the group through, subject to the length of the current and inevitable deep recession.
Whitbread has chosen to see the situation from a different angle. Quite apart from boosting liquidity, the rights issue provides the opportunity for a land grab, as some competitors, especially smaller ones, are unable to cope with the almost entire removal of income in the shorter term and go to the wall.
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This could present a particular opening in Germany, where a fragmented and largely independent market is sufficient for Whitbread to have a long-term target of 60,000 rooms in the country, as compared to the present number of 9,800.
The German market currently represents a fraction of Whitbread’s overall revenues, but nonetheless lends itself to Whitbread’s business model.
At the same time, the fact that its German hotels reopened on 11 May should provide a good litmus test of what can be expected in future across the company, such as booking numbers and customer demand, alongside the introduction of strict social distancing and hygiene measures.
Since the disposal of Costa Coffee last year, Whitbread has struggled to replicate what had been the source of a constant turbocharge to its revenues, by necessity concentrating its efforts mainly on hotels, and Premier Inn in particular.
A weaker UK travel market, cost inflation and the costs of start-ups in Germany resulted in a decline of 8.2% in adjusted pre-tax profit for the year ended 27 February 2020 to £358 million, while high fixed costs and revenues, which have all but disappeared (in the last seven weeks, revenues from accommodation and food/beverages has fallen 99%), pile on further financial pressure.
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For investors choosing to stay with Whitbread’s strategy and commit extra funds to their holding, the rights issue shares are at least being offered at a deep discount to the current price.
However, even prior to today’s announcement, the shares had declined 37% over the last year, as compared to a drop of 19% for the wider FTSE 100 index, with much of the decline pinned to the last three months.
The revised situation is that the Whitbread has now committed itself to having to display an extremely profitable use for the new funds being raised. In the meantime, the market consensus of the shares as a ‘hold’ is likely to remain in place as the strategic situation begins to unfold.
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