Wake up and smell the cof­fee: Whit­bread mi­nus Costa still has a bright fu­ture

Af­ter pock­et­ing £4bn in the ‘deal of the year’ the com­pany has plenty of op­tions for prof­itable growth, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

LETHAR­GIC City folk re­turn­ing to their desks en masse last week no doubt needed a dou­ble es­presso or two to jolt them back into work mode af­ter the Christ­mas break. But one com­pany whose shares lit up trad­ing screens across the Square Mile with­out re­course to a caf­feine hit was Whit­bread. Just af­ter New Year the com­pany con­firmed that the dis­posal of its cof­fee chain Costa to Coca-cola had com­pleted, adding point­edly that “the sale pro­ceeds of £3.9bn have been re­ceived in cash”.

The cola-meets-cof­fee cock­tail was per­haps the deal of the year last year. Now that 2019 has dawned, the war with Star­bucks is some­one else’s prob­lem and the 277-year-old Whit­bread is left at a cross­roads. In­vestors who bought into the stock a while ago in the hope that the com­pany would even­tu­ally have to un­lock the “con­glom­er­ate dis­count” by split­ting Costa from Premier Inn – its other main divi­sion – have de­clared mis­sion ac­com­plished, aided by the loud voices of a cou­ple of ac­tivist share­hold­ers.

A share buy-back pro­gramme is ex­pected to be­gin im­mi­nently and much of the re­main­ing funds will be handed over to share­hold­ers in time. The ques­tion now is what prospects are left in what re­mains. In­vestors who hope for the full pic­ture along­side a trad­ing up­date this week are likely to be dis­ap­pointed. They will have to wait un­til Whit­bread hosts a cap­i­tal mar­kets day on Feb 13 for the nitty gritty.

Job one for the chief ex­ec­u­tive, Ali­son Brit­tain, is to con­vince the City that the ap­peal of long-term ho­tel ex­pan­sion – plus the funds to pay for it – more than off­sets con­cerns about the weak­en­ing econ­omy. Share­hold­ers were re­minded of the lat­ter in Oc­to­ber in a dis­ap­point­ing trad­ing state­ment that dis­closed un­der­ly­ing rev­enue growth of just 0.2pc in the first half and lower oc­cu­pancy rates.

Un­de­terred, Brit­tain has al­ready de­clared her­self keen to stamp the bud­get Premier Inn brand across Eu­rope. And not be­fore time. A one­mar­ket, one-brand ho­tel chain sticks out in an in­dus­try that has rapidly glob­alised over the past decade.

Whit­bread plans to have 6,000 ho­tel rooms open by 2021 in Ger­many, a larger mar­ket than Bri­tain. That is still a frac­tion of the 74,000 rooms al­ready trad­ing at home, where Premier Inn is the mar­ket leader, with ad­di­tional com­mit­ment for an­other 13,000.

How­ever, an­a­lysts at Bar­clays – who pub­lished a note a year ago ask­ing what would hap­pen if Whit­bread sold Costa – said Ger­many could be gen­er­at­ing £100m of earn­ings for the group in a decade and is val­ued at lit­tle or noth­ing by most com­pany fol­low­ers thus far. Be­cause its debts are so low, the com­pany also has op­tions to ac­cel­er­ate its ho­tel ex­pan­sion through ac­qui­si­tion and has al­ready done so on a small scale.

The other an­gle is prop­erty. Whit­bread has so far cho­sen to own and op­er­ate its ho­tels, which sets it apart from many of the larger chains. The likes of In­tercon­ti­nen­tal Ho­tels Group pre­fer the “as­set-light” model that has seen most pure-play hote­liers turn them­selves into brand own­ers and man­agers, of­fload­ing free­holds and hand­ing bil­lions back to in­vestors.

Whit­bread is un­der no pres­sure to do that, but it might re­or­gan­ise it­self to spot­light bet­ter the £5bn of prop­erty as­sets it is sit­ting on. The idea that Premier Inn could be sub­sumed into an­other group is com­pelling. The larger ho­tel groups re­main keen to assem­ble fam­i­lies of brands that op­er­ate at a range of price points.

Also worth a men­tion is Pure, a small chain of healthy eat­ing fast-food stores that Whit­bread has taken a 49pc stake in. It started small with Costa and look what hap­pened to that.

All of these are long-term plans. In the mean­time, Whit­bread must con­tend with tough short-term trad­ing, some of which can be off­set by fur­ther cost cut­ting. The com­pany aims to squeeze out £50m this year and next to help its bat­tle with in­fla­tion.

Whit­bread shares were tipped by Questor last Septem­ber straight af­ter the Coke deal was an­nounced. They have risen by 5pc since then and now trade at 19 times next year’s fore­cast earn­ings. In­vestors have prof­ited hand­somely but those who think the story is over should wake up and smell the cof­fee. Keep buy­ing.

Questor says: buy

Ticker: WTB

Share price at close: £49.58

Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­graph.co.uk/go/ questor­rules; twit­ter.com/dtquestor

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