Investing.com -- Fitch Ratings has revised the outlook for Whitbread (LON: WTB ) PLC’s Long-Term Issuer Default Rating (IDR) from stable to negative. Despite this, the IDR has been affirmed at ’BBB’, along with the company’s senior unsecured instrument ratings.

The revised outlook is due to expectations of increased leverage over the next two years, resulting from substantial investments in Whitbread’s Accelerating Growth Plan (AGP). The company has shown limited commitment to prioritizing debt reduction over shareholder returns. Fitch anticipates that EBITDAR net leverage will return to around 3x by the end of the financial year in February 2028, following a recovery in free cash flow after the investment cycle concludes and the company sees incremental profits from its restaurant-optimization project.

Despite limited diversification compared to its investment-grade peers and a high business concentration in the UK, Whitbread’s ratings remain balanced. The company’s robust financial flexibility, derived from its valuable freehold asset portfolio, continues to offer support.

Fitch expects a reduction in EBITDA in FY26, driving leverage above its negative sensitivity to 3.5x, up from 3.0x in FY25. However, a gradual deleveraging is projected for FY27-FY29 as the AGP begins to increase profitability and free cash flow returns to positive. The company’s announced GBP250 million share buyback for FY26 is expected to be largely funded by operating cash flows and offset by proceeds from the planned sale and leaseback program.

Whitbread’s EBITDA is expected to decline in FY26 due to a 1% UK RevPAR drop and net cost inflation of 2%-3%. Profits are anticipated to be pressured by weaker trading at sites affected by the AGP. However, Fitch expects profits to improve from FY27 onwards, with the ramp-up of operations in Germany and modest UK RevPAR growth contributing to an increase of more than 400bp in the EBITDA margin over FY27-FY28, compared to FY25.

Under the AGP, Whitbread began optimizing its restaurant portfolio in FY25, involving an additional GBP500 million of capex between FY25 and FY28. The plan includes converting over 100 branded restaurants into new hotel rooms and exiting over 100 underperforming restaurants, with 38 divestitures either agreed or completed so far.

Whitbread’s financial policy is conservative, with a leverage target in line with its investment-grade rating. The rating assumes that the company’s financial debt will remain at about GBP1 billion over the next four years. The company plans to use internally generated cash and its sale and leaseback to fund its ongoing capex, which will in turn lift profitability and cash generation, enabling it to release more than GBP2 billion for dividends and share buybacks by FY30.

Fitch projects Whitbread’s free cash flow margin to remain negative, between 10% and 3%, in FY26-FY27 as it implements the AGP with large upfront capex. The free cash flow is expected to turn positive in FY28-FY29, when the AGP starts delivering significant profit improvements and capex normalizes.

The rating reflects manageable execution risks related to Whitbread’s expansion in Germany, where the group aims to become the top hotel brand. The market offers consolidation opportunities, and the group has a history of expansion there, but these investments will impact its profitability. The company expects these operations to reach GBP5 million-10 million in net profit in FY26.

Whitbread’s business profile is commensurate with a low investment-grade rating due to its moderate diversification and business scale. The company’s leading market position in the UK budget hotels subsector, a strong regional presence across the country, and its well-known Premier Inn brand balance this.

Whitbread is rated one notch above Accor SA (OTC: ACCYY ) (BBB-/Positive) and Hyatt Hotels (NYSE: H ) Corporation (BBB-/Stable). Whitbread’s more conservative financial policy and leverage, along with stronger financial flexibility given its freehold property portfolio, mitigate less geographic, brand, and price-point diversification than the two.

The one-notch rating difference is based on the expectation that the company’s net EBITDAR leverage will return to about 3x and its free cash flow margin to positive single-digits when its capex-intensive restaurant optimization project is completed.

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