LONDON (ShareCast) - (Sharecast News) - Pub and hotel operator Whitbread said it was raising £1bn in a rights issue to bolster its balance sheet against the impact of the coronavirus pandemic as it warned of a potential loss in 2021.
Whitbread said the one-for-two rights issue at 1500p a share would be used to take advantage of cheap land prices in the expected recession in the UK and Germany. The company last year sold the Costa Coffee chain to Coca-Cola for £3.9bn and gave £2.5bn back to shareholders.

Adjusted profit before tax fell 8.2% to £358m as a result of weaker UK travel market conditions, particularly in the regions, high industry-wide inflation the start-up nature of German operations, the Premier Inn owner said on Thursday.

"COVID-19 is expected to result in a very material loss of revenue during 2021 and, despite the actions the group is taking, this is likely, given the group's high fixed and semi-variable costs, to have a material impact on earnings which may result in the group not making any profit during the financial year, with the clear possibility that it is materially loss-making during that period," the company said.

The company has been forced to shut its hotels as part of the government lockdown imposed in late March. It has furloughed 27,000 staff on full pay and made use of the government's job retention scheme which subsidises wages up to 80%.

Whitbread, which suspended dividend payouts until further notice, has reopened 16 hotels in Germany, adding that it expected hotels and restaurants in the UK to remain closed or operate at low occupancy levels until September.

"Demand recovery is expected to be slow as social distancing restrictions are gradually relaxed," the company said.

"We are an operationally leveraged business which benefits us in the good times, but in times like these will result in a material adverse impact on profitability," Whitbread said, adding that a 1% fall in revenue per available room equated to a £12m - £15m adverse impact on earnings.

This increased to £18m when the impact of the closure of restaurants was included and as fixed costs become a higher proportion of the overall cost base at lower revenue levels.

Whitbread said it expected around £600m of cash leaving the business in the first half of the current year, including around £80m a month during closure or low occupancy, with an extra £100m from customer refunds and around £130m capital expenditure on committed projects in Germany.

The cash burn will be partially offset by roughly £70m - 85mln of furlough payments from the government.

Analysts at Shore Capital said they struggled with the magnitude of the equity raise and given Whitbread's low starting debt position (£323m at the end of February) and liquidity.

"Even so, Whitbread appears well positioned to drive further market share gains in the UK and perhaps more telling accelerate its expansion plans in Germany, where timing to acquire assets could be fortuitous," they said in a note.

"Although Covid is likely to be detrimental to operating metrics for the foreseeable future it arguably lengthens Whitbread's expansion runway at a time it felt to be shrinking; which could be beneficial to longer-term valuation metrics."

The broker put the stock 'under review' warning it would need more assurances about the state of the UK economy and Whitbread's plans in Germany.

AJ Bell investment director Russ Mould said Whitbread shareholders "won't be covered by Premier Inn's promise of a good night's sleep or their money back".

"Anyone taking part in Whitbread's rights issue will need to assume that life returns to normal in the next few years and that there isn't an earnings nightmare in the near-term."

"The UK summer holiday season could be restricted to 'staycations' which in theory would give Whitbread a boost for its UK Premier Inn hotels. That assumes cafes, restaurants and public toilets are reopened across the country in time and people feel comfortable going out."

Mould said the scale of the issue "would suggest it isn't taking any chances" despite a "fairly decent balance sheet"

"If the world starts to get back on its feet fairly swiftly then Whitbread could be in strong position financially to accelerate its expansion in Germany," he added.

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