Bottom Line: Whitbread comes down to earth

WHITBREAD'S property pendulum was brought into equilibrium with the reality of the Nineties yesterday, after swinging absurdly out of line in 1989 following an upward revaluation of nearly pounds 1bn.

The pounds 595m write-down, representing a mind-boggling decline of pounds 407,000 a day since 1989, leaves the 'A' shares at 482p at a premium to net assets of 442p for the first time in many a year.

But while that rare premium will probably remain intact it is unlikely to widen by any great margin after yesterday's results for 1992/3. Whitbread, burdened more than most by its southern bias, still has much remedial work to do.

Brewing, providing 30 per cent of trading profits in 1992/3, faces a tough time in a market beset by discounting. The division's poor second-half performance, after an excellent first six months, was ominous for the short-term outlook. The likes of Bass, after all, are applying the thumbscrews on margins through a winner-takes- all approach to market share.

Industry observers have long reckoned that Whitbread might be better served either by pulling out of brewing or imitating Allied-Lyons by teaming up with another medium force like Scottish & Newcastle.

The idea is not as bizarre as it seems. Whitbread is unlikely to enhance the brewing division's earnings enough to justify a higher rating than the current p/e of 13 for 1993/4, on projected pre-tax profits of about pounds 240m.

It is not all sweetness and light elsewhere in the group, either. Whitbread Pub Partnerships, the leased side of the business, saw profits tumble 11 per cent to pounds 57.1m. Some 536 outlets were sold during the year and more churning of pubs is needed.

Hotels also had problems. Lansbury and Country Club hotels suffered from the pressure on room rates. The British public has taken to negotiating prices with all the relish of customers at an oriental bazaar. Travel Inns, however, maintained margins on creditable occupancy levels of 80 per cent.

But there was good news from roughly half the businesses. Whitbread, in particular among brewers, has homed in on the value-for-money end of eating out, whether in Brewers Fayre pubs or in Pizza Huts.

Whitbread's managed pub estate was again the star performer. A 13 per cent rise in sales to pounds 1.56bn was matched at the level of profits, which rose from pounds 119.9m to pounds 135.7m. The managed off-licence businesses boosted profits by 30 per cent, reflecting the completed merger of the Peter Dominic outlets into Thresher.

These performances offer hope for the future but in view of the high prospective p/e ratio a gross yield of 5 per cent on the 17.75p dividend is probably the best justification for holding the shares.