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
Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
ebooks
ebooksA celebration of British elections
  • Get to the point
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: Trainee Consultant - Surrey/ South West London

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

Ashdown Group: Trainee Consultant - Surrey / South West London

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

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before