Interactive Investor

Whitbread shareholders will sleep better after these results

26th October 2021 08:14

Richard Hunter from interactive investor

Whitbread is confident of a return to pre-pandemic profit margins despite the current challenges, and there's been a positive response to half-year figures.

The expected staycation rise in the UK due to restrictions on overseas travel has played into Whitbread's (LSE:WTB) hands, although a full return to pre-pandemic levels has yet to be achieved.

The adjusted pre-tax loss of £56.6 million is a vast improvement from the previous year’s deficit of £367 million, but remains some way away from the £236 million profit achieved pre-pandemic. With most of the country under various levels of restriction in the first quarter, there has been a material impact on the first-half numbers overall.

There are also other factors at play, with Whitbread at the mercy of rising inflationary and supply chain pressures as with so many other companies. The hospitality industry is also particularly affected by a tight labour supply. Longer term, the jury remains out on the return of office-based visitors, as business travel struggles to return to previous levels following the success and ease of virtual meetings which became evident throughout the pandemic.

In addition, the boost from international travellers, which account for some 10% of revenues, has yet to return, although demand from tradespeople (around 25% of sales) has been resilient throughout.

Even so, the company has a following wind on a number of fronts. The previous fundraising activities provide strong foundations for the balance sheet, there is flexibility arising from the fact that 60% of the hotel estate is freehold, and the recovering levels of revenue have helped switch net debt into net cash to the tune of £60 million.

This puts Whitbread in the enviable position of being able to continue to invest in the business at a time when some of its smaller competitors are hamstrung due to a lack of finance, or even face the prospect of going to the wall. The company is showing no signs of slowing down strategically, with an aim for 110,000 rooms in the UK from the current 80,000, and with investment in its other major market of Germany continuing apace. For the latter, the investment is also bearing fruit, with revenues ahead of pre-pandemic levels by 197%.

In the meantime, there are some encouraging signs. The occupancy rate in the UK presently stands at 81%, as compared to the 55% level which the company previously identified as being the breakeven point, while in Germany the rate has exceeded 60% in August and September. Although some seasonal slowdown is expected in the run-up to Christmas, Whitbread is confident of a return to pre-pandemic profit margins despite the current challenges.

Clearly, this will not be an overnight fix for Whitbread but on balance the group is at least in the position of being able to ratchet up the growth in the areas within its control.

The share price has also reflected some of the recent optimism, having risen by 32% over the last year as compared to a jump of 25% for the wider FTSE100 and with an immediate outlook, which is significantly more promising than has been the case for some considerable time, the market consensus of the shares as a "strong buy" also remains intact.

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