Cube UK Report (27 April 2021) – HSBC hesitates, Whitbread doubles down

Cube UK Report (27 April 2021) – HSBC hesitates, Whitbread doubles down

Good morning, it’s Roland here with today’s Cube Report.

I’m planning to take a look at two FTSE 100 heavyweights that have published numbers today.

  • HSBC Holdings
  • Premier Inn owner Whitbread

HSBC Holdings

  • Stock data should display here.
Market cap £86.3bn
RNS Q1 results
Writer disclosure No position

Asia-focused banking giant HSBC saw profits bounce back sharply during the first quarter. The bank’s reported profit after tax for the period rose by 82% to $4.6bn, helped by a net release of $0.4bn reflecting lower bad debt expectations. The bank says this reflects an improved economic outlook compared to 2020.

Return on average tangible equity for the quarter was a respectable 10.2%, on an annualised basis. This is a significant increase on the 4% reported for the same period last year, when results were hit by a $3bn bad debt charge, including a $600m provision for failed oil trader Hin Leong in Singapore.

HSBC’s common equity tier 1 (CET1) capital ratio remains high (safe) at 15.9%, which is unchanged from Q4 2020. But as Graham has commented previously, this is arguably almost too high. When paired with a net interest margin of just 1.21%, I can only conclude that HSBC is struggling to find profitable opportunities to lend money — its core business.

One other point that struck me is that despite the bank’s plan to cut up to $5.5bn from annual costs, operating expenses rose by 9% during the quarter. Even on an adjusted basis, costs were 3% higher, due to performance-related pay accrual. Cutting costs doesn’t seem easy.

Outlook: HSBC’s outlook statement for the remainder of the year is carefully neutral. Customer lending is expected to grow at a mid-single-digit percentage and bad debt provisions are expected to be slightly lower than the guidance range provided last year. The bank reports an improving outlook, but warns that a high level of uncertainty remains.

My view

These results seem to suggest that the direction of travel is positive, after a difficult year. I’m confident HSBC will be a long-term survivor. But I have some reservations about the bank’s investment appeal at the moment.

One concern is the political situation. HSBC shareholders prize the bank’s UK domicile and FTSE 100 listing. But the bank makes more than 90% of its profit in Asia, mainly in China and Hong Kong. This means that CEO Noel Quinn must also ensure that HSBC remains in favour with the Chinese authorities.

It’s not an easy balance to strike, and I wonder if further separation between HSBC’s Asian operations and its UK business is inevitable. The bank is currently in the middle of a programme to shift underperforming assets away from sluggish Western markets and into its Asian markets. This is expected to improve future profitability, but it could also pave the way for a clearer divide between the two regions.

Finally, I’m underwhelmed by the dividend on offer. The bank’s normal quarterly payouts remain suspended this year, with an ad hoc interim payout likely instead. Although Mr Quinn intends to adopt a payout ratio of 40%-55% of earnings from 2022, even this only implies a yield of around 4.6% next year.

HSBC shares continue to trade at a discount of around 25% to their tangible net asset value. As things stand today, I think that’s probably fair.

Although I expect performance to improve in time, I’m not tempted to buy back into this former holding. I think there are better choices elsewhere in the banking sector.


Whitbread

  • Stock data should display here.
Market cap £6.9bn
RNS Preliminary results
Writer disclosure No position

2020 was a year to forget for Premier Inn owner Whitbread. Today’s full-year results (for the year to 27 February) contain some dire numbers:

  • Revenue: down 71.5% to £589.4m
  • Pre-tax loss of £1,007.4m

However, these numbers are of little interest except to historians, in my view. Forced to shut its hotels, Whitbread could do little last year except survive and plan for the future. The firm has done both. In today’s commentary, CEO Alison Brittain makes it clear that she plans to stay focused on delivering the group’s pre-pandemic growth plans.

  • 92% of UK hotels already open, full reopening to leisure guests from 17 May
  • £350m capital investment planned for FY22
  • Major new Premier Inn advertising campaign is planned
  • Opening 2,000-3,000 new rooms in the UK, with c.2,000 planned in Germany
  • Continued expansion of pipeline of new hotels in Germany. Whitbread believes it can rollout the Premier Inn model successfully in Germany, consolidating a market that’s much more fragmented than in the UK.
  • £100m of cost savings targeted by FY24

Broker forecasts ahead of today’s results suggested that the group will achieve a result somewhere around breakeven this year.

Fortunately, Ms Brittain took steps to strengthen Whitbread’s balance sheet last year, with a £1bn rights issue in June. This has left the business with £1.2bn of cash on hand and minimal net debt, except for £3.3bn of lease liabilities. Assuming life returns to normal over the remainder of this year, I don’t expect any further financial problems for the group.

My view

I like Premier Inn as an investment (and as a customer). I expect the group to make a strong recovery.

However, I’m not convinced the shares offer much value at current levels. Although today’s share price of 3,350p is below the pre-pandemic price of c,4100p, last year’s rights issue added 67m shares to Whitbread’s share count.

The impact of this is that today’s market cap of £6.9bn is actually higher before the pandemic — Whitbread’s market cap was £6bn in late January 2020.

I’m seeing a lot of this in the leisure sector at the moment. A full recovery to pre-pandemic levels of profitability already seems to be priced in to many stocks. In some cases they look more expensive than in early 2020, when the impact of equity placings and extra debt are factored in.

Although I think it’s fair to expect businesses like Premier Inn and Wetherspoons to return to historical levels of trading, I’m not keen on investing at these levels.

I like Whitbread and might buy the shares at a lower level. For now, I’m maintaining a watching brief.


That’s all for today — thanks for reading. I should be back with you on Thursday.

Roland

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