Derek Pain: I'm ignoring sales worry at Whitbread

No Pain, No Gain
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The Independent Online

Should the no pain, no gain portfolio dump one of its star performers, the Whitbread leisure giant? After all, the shares are quite highly rated and following last week's trading update succumbed to a jittery bout of profit taking. And it is not at all difficult to find City analysts who are advising clients that the shares are now a spent force, deserving to be sold.

In fact the Square Mile scribblers are divided. Besides the sellers there are some saying buy while others suggest a more cautious hold. It is, of course, such differing opinions that underline the problems of assessing the shares and, no doubt, helps spread confusion among small investors.

Make no mistake, Whitbread is no longer an easy share to evaluate. The price has enjoyed a remarkable run. In the past year it has soared from 1,633p to almost 2,700p. When nearly five years ago the portfolio descended on the stock, it was down to 1,105p. Subsequently the price slipped to around 850p. But then, as the recession intensified, Whitbread became a share of our times. Its budget hotels won the hearts and wallets of business travellers as well as those booking for more relaxing reasons. The pub/restaurants, with their keen pricing and wide-ranging menus, grew in popularity and the booming coffee operation expanded dramatically as the nation accepted the habit of lingering over a latte.

But trading is getting tougher. The budget hotels chain, Premier Inn, expects more intense competition from its Travelodge rival and the American-owned Starbucks coffee shops chain should be able to sort out its tax affairs and give Whitbread's highly successful Costa Coffee business something to think about.

In last week's trading statement the group clearly suffered a sales slowdown in the final weeks of its year, although after 50 weeks it was still recording an impressive 14.8 per cent growth. Chief executive Andy Harrison seems convinced profits for the year just ended will meet stock market expectations – around £350.5m against £320.1m last time.

In spite of worries that in these recessionary times the budget hotels and pub/restaurants could feel something of a pinch, they could – and should – still serve up improved results. And there is no reason to think that the Costa Coffee revolution will not continue its exuberant progress. In the 50-weeks period coffee sales were up almost 27 per cent and with the group adding branches at a remarkable pace there seems little prospect of any slowdown. The worldwide coffee chain now embraces more than 2,500 parlours and some 320 are expected to be added this year. Whitbread is aiming for a spread of 3,500 by 2016.

Last week's share display was something of a worry. The price was weak ahead of the update and afterwards further gyrations caused concern. But by the end of the week the shares had regained some composure and at the time of writing are standing at 2,547p.

Although they remain pricey and have enjoyed an excellent run, I think the portfolio should stick with the leisure group. True, the shares are unlikely to repeat the 1,000p advance achieved in the past year, but I expect them to put in another top-class showing this year and, perhaps, beyond. As I have said many times, the portfolio is a long-term investor, not noted for providing frequent commissions to the share-dealing community. Indeed, much of the turnover since the portfolio was created 14 years ago stems from takeover action. And accepting takeover bids does not cost a penny in commissions.

Finally Avation, the aviation-leasing group. It continues to increase its fleet with the delivery of its 11th new ATR 72 aircraft. It will be operated by SkyWest under a deal with Virgin Australia. The two Australian airlines are in the process of merging.

Finance for the latest addition comes from the group's own resources and from an unidentified European bank. Another four ATR 72s are due to be delivered and leased by SkyWest this year.

Avation shares are just above my buying level at 85p after reaching 120p. Stockbroker WH Ireland recently published a 140p target price but so far the stock market has taken little notice. Perhaps it will as more aircraft are leased Down Under.

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