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
Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
news... and what your reaction to the creatures above says about you
News
Jihadi John
newsMonikers like 'Jihadi John' make the grim sound glamorous
News
newsAnother week, another dress controversy on the internet
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003