There was never a worse time to go all-in on the travel industry. Whitbread’s 2019 sale of the café chain Costa Coffee to Coca-Cola left it reliant on guests staying at the Premier Inn, but replacing hollowed-out revenues has made the shares a prime recovery trade.
Free from lockdown and “work from home” advice, leisure and business demand has returned, resulting in revenue more than double the same period last year and a narrowing in the pre-tax loss to £19 million from £725 million, markedly ahead of market forecasts. That’s despite weaker bookings from business travellers and overseas guests, who have typically accounted for around 10 per cent of the total. Revenue per room is expected to recover to pre-pandemic levels this year, faster than anticipated in April.
“Go big, go early”, well-practised bankers are said to tell thirsty corporate clients. A £1 billion rights issue in June last year saw Whitbread through. Unlike some companies in other industries like aviation — think IAG or Rolls-Royce — Whitbread has not been left with the angst of a creaking balance sheet after months starved of revenue.
Net cash stood at just over £60 million at the end of September, down from £196 million a year earlier, but that leaves it comfortable enough against recovering earnings, which stood at £178 million for the first half and are forecast to rise further by the end of February. Covenant limits to be introduced in March 2023 have a net debt ceiling equivalent to five times earnings before tax and other charges.
There are lease liabilities on top of that, totalling £3.3 billion, and the rent bill will become larger as new Premier Inn hotels are opened across the UK and Germany. The plus-side? The group is snapping up new premises on more attractive leases, with cheaper rents, longer rent-free periods and contributions towards refurbishment. At the start of the pandemic there were six Premier Inns open in Germany, a number that has since risen to 21 with a committed pipeline of 52 more.
A large property portfolio can create access to greater financing options. Around 42 per cent of Whitbread’s estate is operated on a leasehold basis, set to rise to 49 per cent once new hotels are opened. That asset base and the scale of its estate could attract private equity interest, thinks Peel Hunt.
It’s fitting that Whitbread doesn’t have a bargain basement valuation: an enterprise value of more than 14 times forecast earnings before tax and other charges next year is above the pre-pandemic range.
The group could become unstuck. The reimposition of restrictions in the winter months is not out of the question, neither is a weaker margin. The staff vacancy rate is just under 6 per cent and staff shortages are not preventing it from staffing new hotels. But it is having to pay more, bringing forward the 5 per cent minimum wage increase by six months, at a cost of up to £13 million this year. It is also grappling with food shortages in hotel restaurants.
Management refrained from putting a timeline on recovering its margin or profit to pre-Covid levels; analysts have pre-tax profit almost touching 2020’s figure during the next financial year at £247 million.
Investors can forget a dividend before 2023 because the terms of its covenant waivers will not allow it. In the near-term, evidence that it is managing cost inflation and firm guidance on returning to pre-pandemic profit guidance would drive further appreciation in the shares. So too would a faster recovery in occupancy. Then it needs to show it can fill a larger estate across the UK and Germany. For now, the shares are priced optimistically enough that those objectives can be achieved.
Advice Hold
Why The shares are already adequately pricing in recovery in revenue and profitability next year
Bunzl
Being described as “boring” is not always a bad thing for a public company: just ask THG or Darktrace, both hammered this week over concerns with their business models. Look too at the ascendancy of a slow-and-steady distribution specialist, Bunzl, whose shares have risen by more than a quarter since the start of last year and trade near a record high.
The FTSE 100 group’s business model is easier to get a handle on than some of the London market’s more exciting constituents. Scale is key: the idea is to be a one-stop shop supplying companies with everything from first-aid kits to cleaning supplies and coffee cups, sourcing items at a cheaper price than they could. It is heavily acquisitive, completing 11 bolt-on deals so far this year and maintaining a database of around 1,000 takeover targets.
A large part of the share bounce can be attributed to higher sales volume and prices for primarily higher margin, own-brand hygiene products in the pandemic, including gloves, masks and sanitisers. Some large orders from governments globally offset the decline in sales to businesses affected by lockdowns.
That revenue spike is slowing: underlying growth was 2.5 per cent for the third quarter, down from 8 per cent for the same period last year, although still 10 per cent ahead of 2019. Margins are also softening as hygiene product inflation eases; it is expected to be slightly ahead of last year but will return to more normal levels during next year.
Pre-tax profits should come in better than expected, brokerage Peel Hunt thinks, raising its forecasts for this year to £654 million from the £630 million initially pencilled in, but down from last year’s £716 million.
While Bunzl was a beneficiary of inflation last year, that might not continue; a bigger concern is Asian freight costs. Notoriously penny-pinching supermarkets account for around a fifth of its customers but the group is managing to pass on higher costs from suppliers through to its client base via price increases. A forward price-to-earnings ratio of 17 is undemanding by Bunzl’s standards, even pre-pandemic.
Advice Buy
Why The group has shown a good ability to handle inflation and demonstrated the benefits of its diversified end markets
