Investment Column: Whitbread stock is a 'Flaming Good Deal'

Halma; Journey Group
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The Independent Online

Our view: Buy

Share price: 847.5p (-3p)

Whitbread's Premier Inn chain is suffering from the Monday blues. While business customers continue to frequent its budget hotels on Tuesdays and Wednesdays, more are staying for just one night, which means quieter Monday and, for that matter, Thursday nights as well. This is hitting Premier Inn's revenue per available room (revpar), a crucial measure of a hotel chain's performance. Whitbread, which also runs Costa Coffee and the restaurants Beefeater and Brewers Fayre, said Premier Inn's revpar fell by 9.6 per cent for the 13 weeks to 28 May, compared with growth of 6.2 per cent for the same quarter last year. City analysts expect Premier Inn's revpar to decline by about 7 per cent this year, but this will be ahead of most in the hotel sector, which is enduring the worst trading for 30 years.

On the upside, Premier Inn, which will open 2,000 new rooms in the UK and overseas this year, increased its business account card customers by 14 per cent in the first quarter and is targeting "weekend leisure break" punters with more promotions. Furthermore, Whitbread's other businesses continue to perform robustly and ahead of expectations. In particular, Costa Coffee, which grew like-for-like sales by 2.6 per cent over the quarter, has defied expectations that consumers would give up their lattes during the recession. Similarly, its pub and restaurants toasted underlying sales, up 2 per cent, as customers tucked into its meal deals, including the "Flaming Good Deals" at Beefeater.

As a result, Whitbread seems set to take advantage of any wider recovery in the economy. Also, in its favour is a strong balance sheet, aided by an ongoing cost-cutting programme. Some analysts believe its shares, which trade on a forward price-earnings ratio of 9.2 times, are now cheap, and that shareholders will not have the blues for much longer. Buy.


Our view: Hold

Share price: 176.5p (+1.5p)

Andrew Williams, chief executive of Halma, came out fighting yesterday. The FTSE 250-listed group, which makes electronic sensors for things such as fire detectors and to spot leaks in underground pipes, issued its full-year numbers, saying that while trading got tougher in the second half of last year, cost-cutting measures the company has implemented since will ensure it continues the habit of generating healthy returns for investors.

We would be a bit nervous about Halma, however. Mr Williams just about admits that things have not yet improved and the shares are expensive, trading at a 16 per cent premium to the rest of the sector, according to the analysts at Numis.

Mr Williams urges punters to consider the 5 per cent rise in the dividend and that the group has a 30-year history of progressive payments. More cost can be squeezed out of the business, he adds, if markets continue to indicate only a pear-shaped recovery.

Add to that the defensive nature of the group's markets, some of which are regulatory-driven, and there is a solid investment case, he stresses.

Despite being nervous about the prospects for Halma over the next six months or so, we are persuaded that buy-and-hold investors are likely to do pretty well over the long term. As with most things, however, it is all in the timing, and we would wait for some softening in the share price before buying. The Numis analysts reckon the stock's premium is justified, but they also advise clients to hold for now. We would tend to agree.

Journey Group

Our view: Avoid

Share price: 4p (-0.5p)

British Airways set about asking staff to work for nothing yesterday, which was rather cheeky, we thought. It is indicative of seriously bad news for Journey Group, however. The company, which provides catering and other in-flight services, saw its share price drop 11.1 per cent after publishing its full-year results.

Journey's figures were impressive in some ways: pre-tax losses were cut to £10.5m, after a loss of £31.8m last year, and new contracts, such as a recycling agreement with Virgin, were signed. Journey's problem is that the aviation industry upon which it relies resembles a nuclear wasteland. While we applaud the company for making "significant progress to reposition itself with an attractive and competitive product range and service offering and with a lean cost structure", it would be remiss of us not to point out that its shares are likely to take further batterings until the airlines recover. That may take a while.

Yes, the stock is cheap, but only attractive if the discount is attributable to mispricing. We reckon the shares will struggle for the foreseeable future, and as such we cannot think of a compelling reason to buy them. Avoid.