Whitbread deserves its premium

Builder Westbury a solid home banker; Bookham growth is already priced in
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The Independent Online

It's time at the bar for David Thomas at Whitbread. The leisure group's moustachioed chief executive is preparing to step down after 20 years service at the former brewer, having finally whipped the company into shape.

Yesterday's interim results showed the company is doing well, give or take the odd hotel brand. The City has warmed to Mr Thomas' vision of creating a leisure company with a brand for every British consumer. From Costa to Pizza Hut, Travel Inn to Brewsters, it's a fair bet that most Brits will have contributed to the group's 3 per cent rise in pre-tax profits, after exceptionals, to £122.5m. Where once the market criticised the group for harbouring all-American brands that lacked overseas expansion potential, now it prefers to focus on the simplicity of its mission: a focus on organic sales growth. Hence the 60 per cent gain in Whitbread's shares during the past six months.

The six months to 30 August marked the group's fifth period of double-digit earnings growth on the trot as steady improvements in like-for-like sales, tight cost controls and cash preservation all paid off. While only one of its hotch-potch of brands is meeting the company's 5 per cent like-for-like sales growth target, David Lloyd Leisure, only one is genuinely struggling to get the goal in its sights. Marriott, the upmarket hotel chain that hails from across the pond, has had a grim two years but there were glimmers yesterday that its fortunes were turning. Its like-for-like sales are inching forwards and are now down just 0.5 per cent in the year to date, improving from minus 4.1 per cent at the start of the year.

The group may deserve its share price premium but with an imminent interest rate rise set to make us all feel poorer, the stock, down 8.5p to 738.5p, looks toppy. Hold.

Builder Westbury a solid home banker

Along with most other housebuilders, Westbury gives the British public what they want: a new house made to look like an old one.

From an aesthetic point of view, it is as if the twentieth century never happened. Anyway, the company says that planning authorities want new homes that blend in with what's already there.

Yesterday's interim figures show the formula is working. Pre-tax profits were up 35 per cent at £47.6m for the six months to 31 August, as the operating margin improved to a healthy 15.8 per cent, from 14.5 per cent for the period last time. The interim dividend is up 16 per cent.

Westbury has reservations worth £366m on its books, which is 10 per cent higher than last year, so the outlook is good. The company has the advantage of not working within the M25, the area most vulnerable to a price correction.

The group, which is seen as a bid target, also offers a "manufactured" houses division, Space4, which should break even in the second half. The unit is in the process of signing up external customers. By making a substantial part of a house in a factory, the aim is to halve the 16 weeks it currently taking to build a house.

The coming rise in interest rates has already hurt shares in the sector but the consensus view is that it should not lead to a crash in the housing market.

The shares, at 400.5p, close to a recent high, trade on a forward multiple of 6. A solid hold.

Bookham growth is already priced in

Bookham Technologies, the optical components maker, was trumpeting a 10 per cent rise in its third- quarter results out yesterday but a closer look gives a murkier picture.

Sales to its major clients Nortel and Marconi, which account for 57 per cent and 14 per cent of turnover respectively, both rose compared with the previous quarter. But both clients have reported a decline in optical networking sales, with Marconi saying the market remains depressed, with more maintenance than new projects work.

Bookham's acquisition last month of its loss-making US rival New Focus staved off a liquidity crisis but offered little in the way of operating improvements and looked to some an expensive way to raise cash. The company has worked hard on cutting costs and a Chinese manufacturing facility bought as part of the New Focus deal - and currently empty - offers further potential cuts in overheads.

Revenue growth will ultimately be what counts. The stock has benefited from the interest of US fund managers and, although the shares fell 8.75p to 146.25p after it reported a third-quarter loss of £29.2m, it is still trading at a premium with a lot of recovery appearing to be priced in. On this basis risk outweighs return in what has proved to be a volatile stock. Avoid.