Despite rebounding strongly over the past year, the share prices of FTSE 100 companies Whitbread (LON: WTB) and British Land (LON: BLND) are yet to recover to their pre-pandemic levels.
Of course, they have been severely impacted by lockdown measures imposed in response to Covid-19. Further, similar challenges cannot be ruled out in the short run.
However, their low valuations, sound finances and strategies suggest they could offer capital growth potential that allows them to outperform the FTSE 100 over the long run.
Whitbread’s share price currently trades around 20% below its pre-pandemic level. Its latest quarterly update shows why investors remain cautious about its prospects. The company’s accommodation sales were 61% down on the same period from two years ago, while food and beverage sales were 86% lower.
However, the quarter in question included a period during the UK’s last lockdown. Since Covid-19 restrictions eased on 17 May, Whitbread has reopened 98% of its UK hotels and restaurants, which have experienced strong demand growth.
Indeed, bookings for its hotels located in tourist locations have been encouraging. Alongside a £100m three-year efficiency programme, this is expected to lead to a return to profitability in 2023. Following this, the firm is forecast to deliver a 46% rise in earnings in 2024, which suggests that its forward price-earnings ratio of 33 could offer fair value for money.
Of course, further Covid-19 restrictions remain an ongoing threat for the business. So, too, does an ongoing lack of demand for its locations close to airports and in central London. However, with a cash balance of over £1.2bn as at February 2021 and cash outflow in line with guidance since then, the company seems to have the financial means to survive further challenging trading conditions to capitalise on a long-term recovery.
British Land’s share price has also failed to fully recover since the pandemic commenced. It currently trades around 17% down on its level from the start of 2020, as demand for its offices, retail and leisure units has come under severe pressure. The firm reported a 34% decline in underlying profit in the financial year to 31 March 2021.
However, the end of lockdown measures could prompt higher demand for its locations. Indeed, it has pivoted towards out-of-town retail parks, logistics assets and London mixed-use ‘campus’ locations that may provide superior growth compared to the combined £1.2bn retail and office assets it disposed of during the 2021 financial year.
Furthermore, British Land has £1.8bn of cash and undrawn debt facilities with no requirement to refinance until 2025. In addition, its loan-to-value (LTV) of 32% provides 46% headroom to the level required to meet its debt covenants. This suggests it is in a solid position to survive further short-term challenges.
Clearly, the office and retail sectors are undergoing major changes that could prompt a period of slower growth across the REIT sector. However, with a price-to-book ratio of 0.8, the stock seems to offer a wide margin of safety that could provide scope for capital growth over the long run.