As a way of making money from the gradual reopening of the UK economy, I’ve long been positive about the prospects of Premier Inn owner and FTSE 100 member Whitbread (LSE: WTB). Today’s Q1 trading update suggests that this may have been the correct call.
Trading “significantly ahead”
Unsurprisingly, total accommodation sales in the UK remained far below what would normally be expected over a single quarter (-60.9%). Naturally, food and beverage sales weren’t great either, down 86% compared to what Whitbread was making in FY20 (the year before the pandemic). All told, total sales — including the contribution from Whitbread’s operations in Germany — fell 69.8%.
As scary as these figures initially seem, one does need to keep things in perspective. After all, the UK was still in lockdown for much of this time. Moreover, positive momentum at this FTSE 100 giant appears to be gathering pace.
In addition to stating that it had traded “significantly ahead of the market” in Q1, Whitbread commented today that it had seen “encouraging trends” since 17 May (Step 3 of Boris Johnson’s lockdown roadmap), by which time 98% of its hotels were open. In Germany, 19 of the company’s 30 hotels are now open.
What next?
Despite Boris Johnson’s decision to delay fully reopening England, Whitbread said today that it would not be making any changes to its full-year guidance. The hotelier also said that it expected “very strong” leisure demand in tourist destinations over the summer. This largely positive outlook should be reassuring for holders, even if a recovery in business demand may not happen until the the autumn. It also goes some way to explaining the near-4% rise in the share price this morning.
As a longer-term investor, however, I’m more interested in Whitbread’s growth strategy. We’ve known for some time that the FTSE 100 member wanted to take advantage of rivals’ relative instability during this tricky period. It comes as no surprise, therefore, that 10 new hotels were opened over Q1. This attempt to “optimise” its estate and snap up sites should stand it in good stead when normality returns.
The company’s plans for its German market are also compelling. Having added three new hotels over the last quarter, the FTSE member now has a pipeline of 73 sites in the country.
On top of this, Whitbread’s finances seem in good order. Net debt stood at £70.6m at the end of Q1, thanks in part to an accumulation of customer deposits. This has allowed the company to continue marketing investment to generate more visits to its website.
My verdict
Whitbread’s share price is still some way below where it stood pre-pandemic. While wary of becoming fixated on this target, it does suggest there’s quite a bit of upside remaining.
But there are downsides and ongoing risks too. Dividends, for example, are still to be restored. So, I’d steer clear of the stock for now if I were looking to generate income. Moreover, I can’t overlook the possibility that there could be more coronavirus-related crises in the months ahead. Despite its market-leading position, the £7bn cap will never be free of competition either.
Even so, I do believe this is the beginning of the end rather than the end of the beginning to Whitbread’s woes. As such, I’d still be happy to buy this FTSE 100 stock today.
