Poll

How should Whitbread spend its cash?

In May Whitbread announced that it was raising £1bn to help unlock “growth opportunities” in Germany. But how should it spend the cash? We would be interested to hear your thoughts, here.


The company said that it was ready to open “safely and quickly” in the UK and that it had paid its rent bill “on time and in full”.

The company has a 60:40 mix of freehold to leasehold in its estate.

Whitbread said that it had agreed 18 month covenant waivers with its lenders and had “significant headroom with withstand meany months of closure”. However, CEO Allison Brittain said that the group’s leverage would “increase significantly” in the first half, with £80m of operational cash outflows per month when its hotels and restaurants were closed or operating at low occupancy.

As at 15 May, the group had cash of approximately £300m and access to its £950m credit line, of which only £50m was drawn. Brittain described the rights issue as allowing the group to “flexibly invest with confidence. It’s very much an offensive capital raise”.

She said: “Our strategy is clear and straightforward; we have opportunities to invest in the UK and Germany as the result of a structural shift from independents into budget branded operators. In Germany the independent sector is 70% of the market and they are declining. We’re already seeing distress in our large branded competitors - they are not paying their rent. They will be constrained in growth. The independent sector will struggle to provide the high quality safety and cleanliness and the additional cost of social distancing. We expect them to hang on for a little while, then come out of the market.”

In Germany the company has reopened 16 hotels. In the UK the group has 39 hotels open, with social distancing, health screening, use of PPE and enhanced cleaning standards in operation, Brittain said that Whitbread was planning based on the assumption that hotels and restaurants remained closed or at very low levels occupancy in the UK until September. “Demand recovery is likely to be slow, so we will have a phased reopening. Guests will only choose brands which they trust to meet high levels of cleanliness.”

Brittain said that, since 2010, there had been a decline in supply of independents in the UK and Germany, “leaving an opportunity for Premier Inn”. She added: “The downward pressure is likely to increase on independents. We have seen some evidence of distress in the sector, leaving an opportunity for Premier Inn to grow market share. We will be able to deploy capital where others have been restrained” identifying a route to 50,000 rooms in Germany.

The group’s open and committed pipeline in Germany stood at 9,800 rooms across 52 hotels. In the UK the pipeline was13,000 rooms.

Brittain commented: “It’s quite interesting running a business without revenue. You get a clear picture of fixed and variable costs.”

For the full year the company reported a 9.4% drop in adjusted Ebitda to £567m.

Ian Forrest, an investment research analyst at The Share Centre, said: “The company is taking a range of measures to boost its finances during the pandemic and says it plans to use the proceeds of the rights issue to grow its Premier Inn business in the UK and Germany; however, for investors there remains a lot of doubt about when its UK business will fully reopen and what impact the ongoing distancing measures might have on revenues. The severe economic slowdown could also have a longer-lasting impact on demand and dividends remain suspended.”

 

Insight: The rights issue was priced at a 37.4% discount to the closing price on Wednesday of £23.95, which was off the group’s year high of £51.94. So this is a chance to buy into Whitbread for quite the discount price and, in ‘isn’t hindsight a wonderful thing’ news, we’re betting that the group wishes it still had the £2,5bn it gave back to shareholders last year.

Back then this hack was decrying Whitbread as boring, boring Whitbread, which had to be amended after the group’s strong cash position meant that it was able to top up its furloughed staff’s wages to 100% and that, while its shares looked a little nervy, they didn’t take quite the hit that others in the market did, given all that freehold support.

Now, Whitbread has thrown its lot in with the rest of the sector and is raising money to, as Brittain put it, ensure that it was one of the strong who became stronger, rather than the weak who became weaker. She wouldn’t be drawn on Travelodge, but pointed out that she read the same press as the rest of us. And would it make sense to? The quality of the Premier Inn estate has largely pulled away from Travelodge and the risk of cannibalisation would be high.

Would it make such a bold move? Analysts would rather it focused on Germany and hedged against a UK where it already dominates and where, lest we forget, Brexit features and a Brexit which is looking more spiky by the day.

Whitbread now has the cash - again - to make a bold move in Germany. But it is not the only one. The wall of money gathering on the edge of the sector is big enough to block out the sun and much of it is looking to Germany, now that it is perceived as cheaper than pre-virus. The company seemed determined to focus on picking up those independents which fall by the wayside, which means picking up hotels one by one.

Before we were all pandemic, all the time, Whitbread was battling agitating shareholders which wanted to hive off its freehold estate. If it wants to make a big move but not spend all its cash, might now be the time to push into franchising. Brittain was damning of the perils of having to deal with multiple owners, but, having banged the drum of a powerful brand, that looks like the next move.