Derek Pain: Thanks to coffee, Whitbread's still full of beans

No Pain, No Gain
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The Independent Online

Whitbread has proved its detractors wrong. I believe it will continue to do so. The former brewer, now famed for its Beefeater pub/restaurants, Costa Coffee parlours and Premier Inn budget hotels, is surviving the recession in far better shape than many observers expected. In the summer of last year, the No Pain, No Gain portfolio descended on the shares at 1,105p a time. I took the view that they were a splendid hedge against a deteriorating economy.

Earlier this year, the price was down to 690p. It seemed my recessionary gamble had hopelessly misfired. But trading appears to have been remarkably resilient and, following last week's interim figures, the shares topped 1,300p. I realise Whitbread could still come a cropper as increasing unemployment and higher taxes take their inevitable toll on consumer spending. Still, chief executive Alan Parker commented: "In the absence of a marked deterioration in the economic environment, we remain confident about the outturn for the year." The group's outlook is, no doubt, bolstered by a robust start to the second-half year.

True, half-time profits were lower at £105.9m against £117.1m. Year's figures are also likely to be down, say around £190m compared with £198.6m. But at one time, much leaner figures were expected, despite Whitbread's value-for-money approach, which seems a reasonable recipe for these straitened times. Budget hotels, the largest profit contributor, have suffered, although not by as much as some expected. The pub/restaurants have performed reasonably well and the coffee shops have comfortably exceeded expectations.

Whitbread is the portfolio's only Footsie stock, having just rejoined the elite battalion of top shares. In its near 11 years' existence, the portfolio has embraced only a few FTSE constituents. Three, Allied Domecq, Safeway and Scottish & Newcastle, fell victims to takeover assaults. Another, Six Continents, split into two – InterContinental Hotels and Mitchells & Butlers, the pub chain.

Only Rentokil Initial, the delivery to pest-control group, failed to enrich the portfolio. Its shares were dumped at a considerable loss. Ironically, they have also just returned to Footsie, following a startling revival as new management got to grips with the group's substantial problems. But the price has still to reach my 143p buying level.

Alongside Whitbread, the portfolio embraces three other fully listed shares. The rest are on the junior AIM market with just one, English Wines Group, residing on the fringe Plus facility. Booker, one of the fully listed stocks, enjoys a capitalisation of around £650m. It is, therefore, a long way from qualifying for Footsie membership. But I would not be surprised if, under the inspirational leadership of chief executive Charles Wilson, an ex-Marks & Spencer director, it is challenging to join the top bracket in a few years.

Its interim results were in line with forecasts with pre-tax profit up 12.1 per cent at £29.7m. The dividend was lifted by 20 per cent to 0.24p a share. Even so, the cash-and-carry chain remains a low-yielder and capital appreciation rather than income is, for the time being, the name of this particular game.

Of the other fully listed shares, Marston's, the brewer and pub owner, has slipped below my buying price with Mears, the support services group, a few coppers to the good. It seems a meeting with City analysts inflicted Marston's damage. At the end of last month, the group took a party of scribblers on a pub-sightseeing tour. The result: a 10 per cent share price fall at a time the stock market moved higher.

I remain anxious to strengthen the portfolio. I could descend on another Footsie group, such as Compass, the catering giant, to provide extra ballast. At the other extreme I am wondering about a Plus company, Investments West Midlands.

In a reverse all-share takeover, apparently valued at £1.5m, it is absorbing a fund manager called Bluehone. Michael Jackson, chairman of an AIM-traded constituent, SnackTime, is involved in the transaction which could create a formidable investment force in the small cap field. Evolve Group, which controls stockbroker Astaire (formerly known as Blue Oar), will end up as a near 20 per cent shareholder in the combined group.

IWM shares are suspended, awaiting completion of the deal. So, any action on my part must await their re-appearance on Plus.

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