Derek Pain: Doubts, but let's keep faith with Whitbread

No Pain, No Gain
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The Independent Online

Once again, the Whitbread leisure group is dividing the City's scribblers. Last week's full-year figures, which I regard as impressive, seem to have provoked a yawning chasm among analysts, with some maintaining that the shares have had their day and others that, despite their exotic progress, they are still worth buying.

What has alarmed some is the group's ambitious expansion plans. Its chief executive, Andy Harrison, does not believe in letting the grass grow under his feet.

Mr Harrison has decreed that the Premier Inn budget hotels offshoot should add another 45 per cent to its domestic room stock in the next five years – and over the same period he aims to double Costa Coffee sales to around £2bn.

His bold plans to enlarge the group by 2018 come on top of an adventurous development, already in train, to dramatically increase the two operations by 2016.

Mr Harrison said : "The exciting organic growth opportunities, together with a clear focus on returns, will continue to create substantial shareholder value."

But it seems some observers are not as optimistic as Mr Harrison, who used to navigate the budget airline easyJet. They feel his desire for growth could lead, at best, to stagnation. On top of expansion worries they cite the possibility that the nation's economic straitjacket will damage Whitbread's consumer-focused operations.

Readers will recall that when the former brewer, recruited to the No Pain, No Gain portfolio in the summer of 2008, rolled out an earlier trading update, many analysts felt the good days were already over as customers cut back on spending, and advised a selling stance.

Ever since the financial crisis enveloped the country, the group has not been short of sell advice. Yet over the past five years, as the company happily points out, average annual growth in sales has been 11 per cent, earnings per share 13 per cent and dividends 12 per cent.

During the same period, the shares have been as low as 850p. They are, as I write, at 2,656p.

Whitbread and the Booker cash-and-carry chain are the undoubted stars of the portfolio. It descended on the coffee shops, hotels and pub/restaurants group at 1,105p a time. Against the worries about Whitbread's prospects is the undeniable fact that, once again, it shrugged off the impact of recessionary influences last year.

Pre-tax profits came out at £355.3m against £305.8m, with the year's dividend increased by 12 per cent to 57.4p. Revenue advanced 14.2 per cent, and group debt was trimmed.

Ahead of the figures, the shares were strong. But once the results were published, the price fell more than 100p before recovering. Clearly, the share response reflected some advanced favourable publicity and the battle between analysts.

As The Independent pointed out last week, one voice raised against the group was the City investment house Investec. It says sell with a 2,000p price target. Stockbroker Liberum Capital is on the other side of the fence: it regards the shares as a top medium-term pick and loves the proposed expansion.

I intend to retain Whitbread in the portfolio. But it is silly to ignore the doubters completely. Although I feel the group is on the right track and will continue to progress, there is clearly a danger of dilutive expansion.

So, I have put a sell price on the shares. Should they fall to 2,100p, the portfolio may well dump them. After all, such a price would still represent a handsome result.

My basic instinct suggests the shares will continue to advance – not at the speed of the past year but certainly topping 3,000p. Their current peak is just below 2,700p.

One possibility that seems to have evaporated in recent times is that the group will sell – or float – its Costa Coffee side.

The former Whitbread finance director Chris Rogers is now in charge of the coffee pot. If ever a person was well-equipped to mastermind a flotation, it is he.

The speed of Costa's growth since Whitbread dropped beer for coffee is remarkable, and I am sure the temptation to cash in on its rise to the top of the British coffee shop business must be strong. Whitbread has indicated that it has no plans to unload Costa – but it admits that could happen.

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