The Whitbread (LSE:WTB) share price suffered tremendously in 2020. Throughout the first six months of the year, it lost nearly half its value as the pandemic wreaked havoc on the hospitality sector.
But following its interim results released last October, the Whitbread share price has been recovering. And has since increased by 55%. Is this a sign that the worst is over? Will it return to its pre-pandemic levels? And should I be adding the stock to my portfolio?
What’s going on with Whitbread’s rising share price?
Whitbread is an owner of both hotels and restaurants that generate 64% and 36% of revenue, respectively. It operates under multiple UK brands including, Premier Inn, Beefeater, Brewers Fayre, and several others. Unfortunately, these just happen to be some of the worst types of businesses to be heavily impacted by pandemic.
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Its locations were forced to close multiple times throughout last year. So the company reported a 77% decline in revenue as well as a net loss of £153.7m. While this is obviously bad news, the interim report did reveal some promising trends that may explain why the Whitbread share price started to climb.
An independent report from PwC estimated that the UK hotel occupancy rate for 2021 will be around 55% and won’t return to pre-pandemic levels until 2023.
However, in the case of Premier Inn, while its average occupancy is around 50%, some of its seaside and tourist area hotels are seeing levels closer to 80%. What’s more, its newly established operations within Germany have experienced 32% growth in sales, even with all the lockdown restrictions in place.
Combining this performance with Whitbread’s successful rights issue that raised £1bn last year makes me believe the worst may have passed.
Risks to consider
Both Whitbread’s hotel and restaurant businesses appear to be recovering based on quarterly performance. However overall, sales for both segments are still down by around 70% over the last nine months. The firm did raise a substantial amount of capital to see it through the remainder of the pandemic. But this may not be enough if the easing of lockdown restrictions is delayed, or if new health emergencies crop up in the future.
Another risk to consider is unrelated to the pandemic. The budget hotel industry is incredibly competitive, which limits Whitbread’s pricing power.
The bottom line
Whitbread has a long road to recovery ahead, and I believe the share price has somewhat prematurely increased. However, I find the strong performance from its German operations encouraging. These international hotels appear to be a new source of growth that could propel the share price even higher than its pre-pandemic levels over the long term.
Personally, I’m cautiously optimistic that Whitbread’s share price will recover in 2021. But I would rather wait to see how the firm performs over the next few months before buying any shares for my portfolio. Therefore, the stock is staying on my watch list for now.
