Hotel operator looks well placed to benefit from the problems affecting rival Travelodge
Thursday 06 Aug 2020 Author: Yoosof Farah

Its main competitor is heavily challenged, it has a robust balance sheet, it could benefit from a UK ‘staycation boom’ and its shares have not really budged much from their coronavirus correction lows. Now is a good time for long-term investors to buy Whitbread (WTB).

Owner of the country’s largest hotel chain Premier Inn, the company has already seen a pick-up in demand in traditional tourist regions since lockdown restrictions were eased. The firm has more hotel rooms than any other chain in the country and most of its hotels are now open again.

Its share price has remained at around half its pre-coronavirus level at £22.

Premier Inn is primed to extend its market dominant position thanks to the woes affecting its main rival Travelodge. Analysts at HSBC say that ‘whichever way we cut it’, Travelodge’s entry into administration brings ‘clear benefits’ for Premier Inn.

Having spoken to Travelodge landlords, the analysts say they see opportunities for Premier Inn to take on new sites as disaffected landlords exercise new break clauses in their contracts, while going forward Premier Inn could also maintain a grip over long term industry supply as Travelodge becomes a less bankable customer for developers to raise finance against.

All of this, HSBC says, points to potentially higher levels of profitability for Whitbread in the longer term. Given the firm’s current valuation, it has a price to book value of 1.2 times, they see potential for the company to bounce back to around £30 to £36 per share, and possibly higher, as and when profit margins recover.

Analysts at Berenberg don’t forecast a full recovery until 2023. Business travellers for example have always been a significant market for Premier Inn, and this is an area which looks particularly depressed.

Whitbread has an asset-heavy model, which can be both a positive and negative. As it owns its hotels, unlike the franchise model used by the likes of Travelodge, it has a valuation backed by lots of assets. It also has a greater measure of control when it comes to distancing and hygiene measures.

However, the fixed cost base associated with these hotels also means it suffers from an $18 million hit to its pre-tax profit from every 1% change in RevPAR (revenue per available room). Though conversely it also means it will be in a good position as and when RevPAR recovers.

The economic recovery is the other key risk with Whitbread. If we’re in for a second wave and harsh lockdown measures are required again, this will be bad news for the company and earnings will undoubtedly take longer to recover.

This is a stock which should reward patience. A well-known brand (you know what you’re getting with Premier Inn), it has a strong balance sheet, more than enough liquidity to see it through another downturn, and good potential for long-term growth as it looks to add to its estate.

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