Whitbread finds life after beer:The Investment Column

Perceptions are slow to change and Whitbread will no doubt be seen as a brewer for years to come. Actually, it is a retailer, increasingly of food rather than booze, and a leisure company that, among other claims to fame, is Britain's leading golf course operator.

In the year to March, brewing accounted for less than 15 per cent of group profits, slightly less than the profits contribution of the tied pub estate. Restaurants and leisure, where the portfolio includes the Beefeater chain, the Marriott's UK hotels and David Lloyd Leisure, chipped in twice as much and managed pubs three times.

That balance is a reflection of Whitbread's success in managing the transition from a declining, competitive market to a range of fast-growing areas with potential to provide growth for years to come. One analyst calculates that the changes mean Whitbread is now more exposed to consumer recovery than any of its brewing rivals.

Another attraction of Whitbread lies in its ability to take advantage of better trading conditions by investing heavily in its growth areas. In the year to March capital investment of pounds 345m swamped depreciation of only pounds 93m.

Although cash flow appeared to show a chunky pounds 378m outflow during the period, adding back that excess capital spend and the cost of businesses acquired during the year confirmed that Whitbread's underlying businesses are nicely cash-generative.

That gives it plenty of firepower to grow organically and to make acquisitions, although it poured water yesterday on the market's more outlandish rumours. Certainly the evidence of recent purchases is encouraging.

Buying Marriott's UK chain seems to have caught an upturn in the hotel cycle at just the right moment. Occupancy in the six months since acquisition was 5 percentage points higher than in the comparable period at 73 per cent and room rates were nicely ahead.

Most impressive, however, is the way Whitbread has outperformed modest improvements in its markets. In the last two years its share of the UK beer market has risen from 13.2 per cent to 14.3 per cent, with growth in the high-margin premium beers sector especially strong. On-trade sales rose slightly compared with a small market decline, while take-home sales, up 15 per cent, left a 7 per cent market rise standing.

Since we described the shares, somewhat harshly, as a good safe investment six months ago, they have risen from 629p to 738p yesterday, down 8p after some profit-taking. On the basis of forecast profits of pounds 320m this year and pounds 354m to March 1998, the shares stand on a prospective price/earnings ratio of 15 falling to 14. That is a premium to the market but, ahead of the expected consumer recovery, rightly so. Still good value.