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
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
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