Derek Pain: I'll ignore sell talk and keep Whitbread

No Pain, No Gain

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The Independent Online

The City seems to have mixed feelings about the Whitbread leisure group. Whereas some stock-market players enthusiastically claim the shares are on the way to 2,650p – even 2,800p – others are much more subdued.

Indeed, it is not difficult to come across those who suggest selling is the order of the day. According to many stockbroker analysts, the shares will suffer from profit taking and it would be wise to at least trim holdings. There is also a feeling that the group faces some uncomfortable trading as customers tighten their belts.

True, Whitbread shares are not in the bargain basement. The no pain, no gain portfolio has enjoyed a generous time since it invested at 1,105p in July 2008 against, as I write, 2,419p.

Like all consumer-facing businesses the budget hotels, pub/restaurants and Costa Coffee group, operates in a tough environment. Yet it enjoyed robust trading in its third quarter and seems to be on track to meet, and possibly exceed, City expectations.

The powerhouse is the Costa operation. At the last count the rapidly expanding division embraced 2,437 coffee shops and 2,365 stand-alone coffee machines. To add a little caffeine stimulation to Costa's growth there is every possibility that it will continue to benefit in this country from rival Starbucks' tax humiliation. There is also the prospect that Whitbread will eventually float the coffee side as a separate company. So the portfolio is hanging on to the shares.

The trading update came too late for my portfolio valuation, published last week. Nevertheless, its performance, which briefly pushed the shares to 2,557p, represented a high note on which this column ends 2012 as my next effort will not appear until next year.

There is, it appears, a view that it could be a rewarding one. Schroders, one of the City' oldest names, is bullish. It says unequivocally : "We have already passed the low points for UK equities – below 3,500 on FTSE 100 twice in the last 12 years – and are in the foothills of a new bull run." And AXA Investment Managers suggest being "overweight" in shares.

Others who are relatively cheerful include Aberdeen, the investment group, claiming "investment opportunities remain" despite world economic uncertainty and Bestinvest which says shares provide better value than fixed-income offerings and adds: "Equity yields are also attractive and well covered by underlying earnings."

The closing year has yielded some smart returns as evidenced by the Footsie advancing some 500 points although it is still a long way from the high achieved at the turn of the century when it almost touched 7,000.

I am happy to go along with the optimists; shares should make further headway next year, although I would be surprised if the old peak is conquered. After all, the euro crisis and worldwide economic problems are unlikely to be resolved in the coming 12 months.

One share, naturally a no pain, no gain constituent, I expect to perform is Northern Petroleum. It has been something of a disappointment with the stock market unwilling to accept the valuations flying around. The dry well off the South American coast that I referred to last week has, I believe, had an unjustifiably severe impact.

Director buying has helped lift the price from 48p to around 57.5p, still below the portfolio's 68p investment., the internet website, points out that Northern's stake in the South American exercise may be worth £60m. At the present £54m capitalisation, the rest of the group's interests are, therefore, in for nothing. Assets include £22m in the bank, wells in England and Holland and highly promising licences in Italy that together could add up to around £174m.

The dry drilling has little, if any, impact on the likely value of the South American adventure. Oil has already been found in the vicinity and further exploration is expected to confirm impressions that a significant oil field has been discovered

Avation, another constituent, continues supplying aircraft to the joint venture of Australian airlines SkyWest and Virgin Australia. Although profit expectations have been pulled back, the shares still have long-term attractions.

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