Investment Column: Costa gives Whitbread shares a pick-me-up

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The Independent Online


Our view: Buy

Share price: 1380p (+50p)

On Friday, Costa Coffee owner Whitbread revealed that it was considering making a £32m bid for Coffeeheaven to expand its presence in Eastern and Central Europe. Yesterday, the hotel and restaurant group showed just why it is so bullish about Costa's prospects, when the chain delivered underlying sales up by 6.7 per cent for the third quarter to 26 November. Whitbread has stepped up its advertising campaigns for Costa this financial year and the chain, which has about 1,500 outlets in the UK and overseas, seems to have genuine momentum. So far this year, Costa has opened 154 UK stores and 22 internationally. It plans to open a similar number next year.

Boosted by Costa, Whitbread said it expects full-year 2009/10 adjusted pre-tax profits will "somewhat exceed" the top end of City forecasts of around £215m to £227m. Analysts also hailed a "dramatic" improvement at Premier Inn, which looks to be close to turning the corner. Helped by comedian Lenny Henry in its TV advertising campaign, Premier Inn has been able to largely offset a fall in revenue per available room – a key measure in the hotel sector – from business customers staying fewer nights during the week by tempting leisure customers with a £29-a-night weekend offer. The Whitbread hotels division, as well as its pub restaurants, which includes Taybarns, Brewers Fayre and Beefeater, also delivered improved sales in the quarter. While the shares are not cheap, trading at a 2010 price-to-earnings ratio of 15.6, some of its rivals' are more expensive. And Whitbread's decision to invest in its business during the downturn – while keeping a tight lid on costs – bodes well for the year ahead, as the UK slowly emerges out of recession. As long as the spectre of a double-dip downturn does not materialise, we think Whitbread's other businesses could start to contribute more to Costa's international sales froth. So buy.

Great Portland

Our view: Hold

Share price: 268.5p (-0.4p)

What do you do if you want to make the most of the recovery in commercial property? Well, if analysts are to be believed, you should pile into parts of the Central London market, where rents are forecast to rise as the economy emerges out of the doldrums. Luckily for investors in Great Portland Estates, their company appears alive to this opportunity. It continues to invest its rights issue proceeds, and yesterday announced the acquisition, via two separate joint ventures, of two properties on Regent Street, bang in the heart of the West End. Initially, both properties will be earnings accretive, as the company's all-in marginal cost of debt is below the net initial yields.Moreover, one of the two adjoins Great Portland's existing holding at Carrington House; taken together, they provide the company with a new development opportunity.

The strategy, in other words, appears sound. The valuation makes us pause, however. After slumping to a low of around 128p in March, the stock is now trading north of the 260p mark, or on a multiple of 32.2 times forecasts for 2011 earnings. In terms of net asset values (NAV), Great Portland is trading on a 4 per cent premium to Evolution Securities' March 2010 NAV estimate. This falls to a 10 per cent discount when measured against Evolution's estimate for March 2011 NAV, however. Although the stock does not appear expensive, thanks to the solid strategy and improving economy, we feel it hardly offers stunning value. For that reason we rate the shares as a Hold until there there are clearer signs of recovery, but we recommend buying if Great Portland's shares begin to ease.

RWS Group

Our view: Hold

Share price: 315p (Unchanged)

RWS is one of those stockmarket oddities with little in the way of realistic comparisons, making it rather hard to value. The company searches patents internationally and translates them and other technical documents. It therefore occupies a rather unfashionable niche that presents formidable obstacles to any rivals that might be tempted to stray onto its territory. Still, the recession has meant it has had to deal with increased competition together with a decrease in demand and other detrimental changes to its business. The weak pound has helped though, and yesterday's figures, with profits a touch ahead, were resilient.

What would really knock RWS would be a Europe-wide patent. This was rejected in 2005, but it is still under discussion. Still, the company has time to diversify and is seeking to do so, and a rating of about 10 times next year's earnings is undemanding (the yield is 4 per cent), so hold.