FTSE 100 member Whitbread (LSE:WTB) was keen to remind investors that it was in good financial health when it delivered its results for the year ended 27 February yesterday. Whitbread started its new financial year with £503m in cash and a revolving credit facility of £950m. Dividends have been cut to keep cash in the business.
It is also an eligible issuer under the UK Government’s Corporate Financing facility. This is a new badge of honour that businesses are keen to tout. What it means is that Whitbread is in good enough financial shape to issue debt backed by HM Treasury.
So, Whitbread should survive the coronavirus crisis and plans to gobble up market share by taking advantage of the battered hotel industry when the dust settles. To this end, Whitbread is seeking to raise a £980m (after fees) by creating and selling new shares. That may not have been necessary had some £2bn not been spent on share buybacks over the last couple of years.
Whitbread was flush with cash after selling Costa Coffee to Coca-Cola for £3.9bn in 2018. Activist investors had been hankering for this to happen. Costa was deemed to be worth more in cash than as part of Whitbread. Shareholders approved the move and had the price of their shares supported by the buybacks.
In need of a pick-me-up
But the sale of Costa exposed an issue. Whitbread’s revenues grew at an average of 9% per annum from 2015 to 2017. In 2018, without those coffee sales, revenue fell to £2.01bn from £3.1bn the year before. Sales revenue grew at just 1.24% on average per year from 2018 to 2020. Without those coffee sales, Whitbread’s revenue growth could not even match UK GDP growth. Although Whitbread’s London hotels were doing okay, regional demand was sagging, with the blame placed on a lack of business confidence around Brexit. Something had to change to drive revenue growth.
A good chunk of the Costa sale money was earmarked for expansion into Germany. The German hotel market is highly fragmented, with many independent and small hotels. This seemed the perfect stomping ground for a hotel chain to scoop up market share.
Unfortunately, the coronavirus crisis has hampered any spending plans, and it’s hard to say for sure how long the crisis will last. Hotels are open in Germany again, but remain closed in the UK, probably until September. A new wave of infections may shut them again.
At present, Whitbread is burning through £80m in cash each month. Planned expenditures amount to £600m over the next six months. How much of that £980m will be available to take advantage of cheap investment opportunities? Much of it looks destined to support existing plans and keep the business alive. This could mean another rights issue should those cheap investment opportunities present themselves in force.
Is Whitbread a bargain?
Whitebread operates in the budget hotel sector, which should benefit from the looming recession. Tourism and leisure travel will pick up again; of this, I am sure. But bosses will have noticed that meetings done digitally cost a lot less than putting staff on the road. The anticipated growth from expansion into Germany might not be as robust as forecast, and taking investment opportunities might rely on issuing even more shares. I don’t think Whitbread’s share price will outperform the FTSE 100.