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Are Whitbread shares too cheap to ignore?

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It’s fair to say that 2020 has been a dismal year for Whitbread (LSE:WTB) shares. Demand has plummeted drastically and they’re down around 43% on the year. Even so, things are starting to look up for the hotel and restaurant group. For example, Premier Inn hotels in both the UK and Germany have reopened and customers are starting to return. The company has also managed to strengthen its balance sheet with a rights issue. As a result, are Whitbread shares now oversold, and is it a good time to buy?

The rights issue

On 10 June, Whitbread was able to complete a rights issue for £1bn, at a price of £15 a share. While a rights issue does dilute shares, and usually leads to a drop in the share price, I believe that this was the right thing to do in this case.

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Firstly, the rights issue will help strengthen the balance sheet. Obviously, revenues are going to be lower for a while and this could put a strain on the business. But the rights issue will help bolster cash reserves and ensure that the firm is well placed to withstand this period.

A large amount of cash on the balance sheet will also allow it to take advantage of cheap investment opportunities. This may include further investment into Germany, where it sees “very significant” opportunities. CEO Alison Brittain has already stated that the company will look to capitalise on cheaper land prices, and Whitbread shares could rise as a result.

Is the worst now over?

The first-quarter update revealed the extent of the damage. In fact, sales fell by 79.4% and the company stated that it was “too early to draw any conclusions from its booking trajectory”.

Although hotels have now reopened, the outlook is still uncertain. For example, with many business customers still working at home, this will deprive the hotel owner of a key source of income. Leisure travel will also take time to recover.

As a result, while I do believe that the worst is now over, I can’t see a full recovery any time soon. Even so, with Whitbread shares currently so cheap, it seems that a long period of reduced revenues is already priced-in to the shares. 

Would I buy Whitbread shares?

Overall, I believe that Whitbread shares do offer a very good opportunity at today’s price. Although the whole industry is currently shrouded in uncertainty, Whitbread should be able to ride out the crisis. This is thanks to its leading market position and a fair amount of brand loyalty. With its strong liquidity, I also think that the firm can achieve further growth, especially overseas. Consequently, I’d buy Whitbread shares but wouldn’t expect a quick rebound. We like to think long term at The Motley Fool and that’s what I’m doing here.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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