Whitbread could fall further after 2021 profit warning

Whitbread shares have fallen more than 25% since announcing its £1 billion rights issue last week, with the stock capable of falling further after its management warned of a potential loss in 2021 due to the impact of the Covid-19 pandemic.

The billion pound rights issue at £15 a share will not only strengthen its balance sheet during these unprecedented market conditions, but also help the hotel and restaurant owner take advantage of cheaper land prices in the UK and Germany in the wake of the coronavirus crisis.

‘Despite the challenges the industry faces, Whitbread’s strategy to drive long-term value has not changed and remains compelling,’ insisted Whitbread CEO Alison Brittain.

‘We have a significant opportunity to continue to build out our pipeline in the UK, along with optimising our large network of hotels by investing in upgraded formats such as our Premier Plus rooms, which are proving very popular with both our business and leisure guests,’ Brittain said.

‘Germany offers an enormous opportunity for structural growth, with a large domestic market and a fragmented and declining independent sector,’ she added.

Trouble ahead for Whitbread

Whitbread’s 2020 full-year results saw its pre-tax profit fall 8.2% to £358 million due to weaker UK travel market conditions, with the company opting to suspend its dividend pay-outs to shareholders for the foreseeable future.

‘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.

Whitbread shares closed 5% lower on Tuesday at £24.51 per share.

JP Morgan predicts Whitbread shares will fall further

Analysts at JP Morgan reacted to Whitbread’s disappointing set of results accordingly, reiterating its ‘underweight’ rating for the stock on Tuesday.

The US-based investment bank also lowered its target price for Whitbread to £20 per share, implying a potential downside for the stock of 18%.

Meanwhile, analysts from Shore Capital took aim at the company’s massive capital raise, given that the business has a relatively low debt pile of £323 million at the end of February.

‘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,’ Shore Capital 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.’

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