The Investment Column: Whitbread's spree ends

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The Independent Online
JUDGING by the weighty pack of slides David Thomas unveiled at Whitbread's press conference yesterday, you would have thought the group's chief executive planned to unveil news aplenty. But, polished as his maiden annual results performance was, the presentation produced little to keep the expectant press pack enthralled.

A few years ago Whitbread, then under Peter Jarvis, was buying everything in site. Marriott Hotels, David Lloyd leisure clubs and restaurant chains such as Cafe Rouge, the Dome and Bella Pasta joined the Whitbread stable in quick succession. Since then, however, all has gone quiet on the corporate front.

For a start, Whitbread has had more than a few difficulties in integrating what it has bought, and notably overpaid for brands such as Cafe Rouge. And purchasing prices have rocketed as the stock market has scaled new heights. So, for the time being, Whitbread cannot find anything to acquire at the right price.

Nor are sales likely. Perennial disposal favourites such as brewing and the tenanted pub estate have attracted renewed bid interest but, so far, offers have not been high enough to tempt Whitbread to sell.

So, for now, the group is likely to rely on building its existing brands to push profits forward. Underlying earnings for the year to February rose 12 per cent to pounds 355m, thanks to the consumer boom which increased trade at its restaurants and pubs.

Whitbread cautioned that trading had been hit by the terrible Easter weather, which caused its shares to fall 30p to 1,060p yesterday. But that looks like a blip given that takings have recovered in recent weeks.

Whitbread's diversity of brands should enable it to continue to capitalise on the consumer boom. Cost cutting should produce more margin improvements and, not before time, its return on capital employed is creeping towards its cost of capital.

Whether it can sustain a double-digit growth rate in profits from its brands is another matter. With the leisure industry pumping huge amounts into expansion everybody could suffer if the economy slows.

Merrill Lynch forecasts full-year profits of pounds 390m, putting the stock on a prospective p/e of 17. The strong run in Whitbread's shares, which has returned the group to a rating in line with the market, has been justified. But, for now, the shares are a hold.