Derek Pain: Whitbread's new shape is riding out recession in style

No Pain No Gain
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The Independent Online

Whitbread continues to defy the bears. In the nearly four years that the hospitality group has been a constituent of the No Pain, No Gain portfolio, detractors have never been far away. In the earlier days of its membership their great fear was that it would be unable to resist the gathering recessionary influences. More recently some have been unimpressed by the group's numbers.

The anti-Whitbread feeling has, admittedly, lost ground in the past year or so. Even so, it seems that 14 per cent of City analysts covering the shares still list them as a "sell". Forty eight per cent say "buy" with the rest sitting on the fence. The portfolio descended on the shares at 1,105p. The price at one time slumped below 800p. Following last year's figures, the shares, as I write, topped 1,940p.

It is not unusual for a group to contend with an army of critics. Indeed, it is often when there is City-wide approval of a share that investors should contemplate running for cover. The stock market is littered with failed companies that once commanded universal support. Whitbread, it could be argued, is an ideal recession-proof stock. After all, its budget hotel chain, in these straitened times, is well positioned to deal with its more fancy (and expensive) rivals. I suppose the major danger is that the cheaper end of the hotel market is getting rather crowded. But the group continues to expand – in this country and overseas. The pubs/restaurants, also in expansionary mood, have, like most of their rivals, adjusted their offerings to present-day requirements. The eating out market – in pubs and casual dining outlets like those run by the Restaurant Group and Prezzo – seems to be catering for their penny pinching customers in some style.

And then there is the coffee explosion. Whitbread was quick to see the coffee shop potential. It moved into the market, with the acquisition of Costa Coffee, in its now almost forgotten brewing days that ended around the turn of the century. Now most high streets have a selection of coffee parlours and growth, in the UK and elsewhere, looks attractive. Margins are pretty good as well.

The group's pre-tax profits emerged at £305.8m, up from £271.2m. Revenue was 11.2 per cent higher and the year's dividend lifted 15.2 per cent. When the portfolio enlisted the shares the year's profits were £198.6m.

Whitbread, as its expansion plans demonstrate, seems pretty confident about future trading although its chief executive, Andy Harrison, warns that returns will vary from month to month.

As I mentioned in April a couple of speculative stories have swirled around. A transatlantic bid now seems to have dipped below the horizon but there remains a strong suspicion that the Costa division will be floated off.

Spirit Pub Co, another portfolio constituent, has also rolled out encouraging figures. Interim pre-tax profits came in at £19.4m compared with a £116.5m loss before the chain was split from the struggling Punch Taverns. The group is clearly enjoying its independence and celebrated its freedom with a maiden dividend of 0.65p a share, and there are hopes the year's payout will be 2p a share. Punch shareholders were handed Spirit shares on a one-for-one ratio when the two groups went their separate ways in the summer.

Although still heavily indebted, Spirit has revamped much of its managed estate where like-for-like sales improved 5.6 per cent. Its leased pubs fared less well but it is thinking of various changes including the possibility of introducing a franchise system. Its pub brands include Chef & Brewer, Fayre & Square and a former brewing name, Taylor Walker.

The pubs group was recruited in August at 42p a share. The price is now around 55p.

One other constituent has produced a few stock market ripples. TEG, the composter, has had "indicative proposals" that are under consideration. Earlier this year it announced a strategic review, in effect putting itself up for sale or inviting investments and other deals. It should have more details soon. The shares are at 8.25p.

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