Investment View: Whitbread still a favourite despite horse-meat scare

Chicken is not only better for you than beef, it's cheaper. So are Whitbread's shares
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The Independent Online


Our view Buy

Price 2,523p (+69p)

After looking like Derby winners for much of the last year, Whitbread shares have dropped into lesser company recently.

Over the last few days they'd have had trouble winning a midweek handicap at Lingfield on its all-weather surface. Of course, there's a reason for the horse-racing metaphors. Part of the reason for the shares' sudden loss of form might be the horse-meat scandal. The company had to withdraw burgers and lasagne from menus as a result of it, and has announced changes in the way it handles suppliers. So hopefully there shouldn't be a repeat.

Of course, if you sit down for a meal at a Beefeater or a Brewer's Fayre, you could always join the growing number of customers who have switched to chicken-based dishes since 14 February (sales are up 10 per cent).

As a rule, chicken is not only better for you, it's cheaper. So are Whitbread shares, and that presents an opportunity.

This is a leisure business with a lot going for it. And if you are worried about the impact of the horse-meat scandal, chew on this: Costa Coffee has been doing very well since an earlier controversy hit Starbucks as a result of the latter's limited contributions to the UK exchequer via corporation tax.

The recent trading statement from Whitbread – which also owns the budget hotel chain Premier Inn – was pretty positive. Sales at outlets open at least a year were up 2.5 per cent at Premier Inn, 1.9 per cent in the restaurants and (drum roll) 7.1 per cent at Costa. So stick that in your panini, Starbucks.

While trading is tough, Costa is going global, and benefits at home from the continuing rise of a coffee culture. Meanwhile, the group's other brands are at the value end of the market, and should be more resilient than most with consumers under the cosh and looking for bargains.

Charles Stanley, the broker, reckons the share price is now up with events, and it is true that even after the shares' recent dip they are no bargains. They trade on 14.8 times earnings forecasts for the year to 28 February 2014 with a prospective yield of only 2.4 per cent. But this is an expanding operation, and growth should be resilient and maybe better. I'd say they are as good a buy as any shares in this particular sector. And if the shares continue to show signs of weakness, if you'll excuse the metaphor, tuck in.

Millennium & Copthorne operates in a higher strata than Premier Inn. You wouldn't expect to see lurid purple colour schemes on the bedclothes at any of its outlets. You might at least hope for something better than the company produced with its recent results, which were as negative as Whitbread's trading statement was positive.

The company's profits were certainly below the broker Panmure's expectations and those of others, too. Profits came in at £148.4m, which excludes £9.3m of property profits, and that's more than £3m below the broker's prediction. They were also below the analysts' collective "consensus" forecast. Worse, in the fourth quarter of the year, profit before tax fell by 18 per cent.

Trading is not encouraging, with declines in each of the three main "gateway" cities of London, New York and Singapore. In the current year it's hard to see much to shout about in London, and analysts don't expect Singapore to excite much either.

The chairman, Kwek Leng Beng, admitted that the hotel sector is becoming more competitive, both because of the current economic uncertainty and because of an increasing supply of new rooms in some of the group's key cities.

He believes the company can withstand the pressure. I would support its owner/operator model for running hotels and plans for new openings in China and the Middle East. None the less, while the shares fell quite sharply in the wake of the results' poor reception, at 541p, I don't feel they have fallen by far enough.

Funnily enough, they now trade on a very similar multiple to Whitbread at 14.7 times this year's forecast earnings while offering a prospective yield of 2.7 per cent. I'd want to see that quite a bit lower before getting involved.

The group is going to have a tough year, and the shares don't really offer good value at the moment. Sell if you haven't already.