Investment Column: Whitbread's calmed City's nerves, so buy

Northern Foods; Scottish & Southern Energy

Our view: buy

Share price: 1407p (+22p)

Whitbread responded to a mounting of City rumours of a cash call by saying yesterday that it had "no current intention" of launching a £100m rights issue. But the owner of Costa Coffee and Premier Inn budget hotels reiterated that it was considering diversifying the sources and tenure of its debt by borrowing more through the capital markets.

That should calm nerves, for now at least. After all, Whitbread has been one of the leisure sector's strongest performers during the recession and appears to have genuine momentum.

The was evident from a 6.6 per cent rise in underlying profits to £239.1m for the 12 months to 4 March, which came despite Whitbread facing strong recessionary headwinds. In particular, its Premier Inn chain suffered a 6.4 per cent fall in revenue per available room, a key measure for the hotel sector, as businessmen and women cut back on overnight stays.

But Whitbread fought back last year with a promotional campaign targeting weekend leisure customers and outperformed the market. The group, which also runs Brewers Fayre and Taybarns restaurants, is to invest an additional £8m in marketing its hotel and restaurants this financial year, alongside a further expansion in the Premier Inn estate. Costa Coffee, which has delivered 32 consecutive quarters of underlying sales growth, also plans to grow from 1,600 shops worldwide to 3,000 outlets by 2014-15.

Furthermore, prospective share buyers may note that Whitbread's stock has fallen back recently, partly because of profit-taking by investors, since hitting a 12-month high of £16.31 on 26 April. The shares now trade on a 2011 forecast multiple of 13, which is a significant discount to rivals including InterContinental Hotels.

While Whitbread could be hit by a relapse in spending by consumers and businesses, we think it is over the worst and its shares offer good value compared to rivals, so buy.

Northern Foods

Our view: Hold

Share price: 46.75p (-1.5p)

Northern Foods is to invest an extra £5m in relaunching its Goodfella's pizza brand this year with its advertisement campaign starring a pizza fairy. Northern, which supplies the big four supermarkets and Marks & Spencer, hopes that the character – a waiter with wings and a wand – will work magic on a tired pizza brand in what it expects to remain a "tough market".

However, the costs of the campaign will weigh on the company's first-half profits. In the previous year to 3 April, Northern Foods delivered flat underlying pre-tax profit of £39.2m, although its performance was a shade above expectations in the City. It further gave the impression of running fast to standstill by posting total sales up only marginally at £977m. While Northern Foods cooked up strong sales at its chilled business and bakery division, they fell at its frozen division, largely as a result of it closing a low-margin pizza factory.

However, there was plenty to recommend in the results. For instance, Northern Foods reduced its net debt to £183m, maintained the dividend and improved its operating margin by 0.2 per cent to 5.6 per cent. Investors may also chew over the fact that its shares, which now trade on a 2011 price-to-earnings ratio of 7.2, are starting to look cheap. However, given the tough outlook for the grocery sector and consumers, we think next year may be a better time to start tucking into Northern Foods, so hold.

Scottish & Southern Energy

Our view: Buy

Share price: 1079p (-27p)

The markets like certainty above all things, and that's exactly what Scottish and Southern Energy delivered when it said that, though it was still interested in the sale of EDF's UK electricity distribution business (and may take a stake), it will not wade in so deep as to necessitate a rights issue.

We usually wait a few months before revisiting our recommendations, but SSE's disclosure means that we can no longer justify the hold rating issued last month. At the time, we voiced fears that the shares could be hampered by the threat of a cash call, even though SSE's dividend policy could pay handsomely if retail price inflation continues to advance at current rates

With the cash call fears dealt with, we now think investors should move in, particularly in light of the increasingly volatile conditions across the capital markets. Utilities such as SSE, which trades on fairly undemanding valuation multiples of less than 10 times forward earnings, tend to benefit during times of economic stress as traders move their money from riskier areas such as finance to defensive sectors such as power and energy. That being the case, we now say buy.

Start your day with The Independent, sign up for daily news emails
Barn owls are among species that could be affected
charity appeal
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas