Whitbread is moving into China, but with profits slowing, don't buy in just yet, says Phil Oakley.
The business
Whitbread is Britain's largest hotel and restaurant group. Its main businesses are hotels, restaurants and coffee shops. Its Premier Inn budget hotel brand offers 48,310 rooms. Meanwhile, there are 386 restaurants trading under the brands Brewers Fayre, Beefeater and Table Table.
Whitbread also has 1,375 Costa Coffee shops in Britain and 802 overseas. Many of the overseas coffee shops are franchised. Additionally, there are 1,172 Costa Express/Coffee Nation self-service coffee machines. Whitbread had sales of £1.6bn in 2010/2011.
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The history
The company can trace its roots back to 1750. This was the year when Samuel Whitbread built the first mass-production brewery in Britain at Chiswell Street in London. The business has changed a lot in recent years. Fifteen years ago, Whitbread had spread itself across large parts of the British leisure sector.
In addition to a sizeable brewing and pubs business, it ran Marriot Hotels in Britain, David Lloyd Leisure clubs, off licences and had a 50% stake in Pizza Hut UK. However, it is now a more focused business. This has paid off, with Premier Inn and Costa profits growing rapidly in recent years.
The chief executive
Andy Harrison became chief executive in November 2010. He was previously CEO at Easyjet and RAC plc, with lots of experience of running consumer-facing businesses. He's a big advocate of keeping businesses simple and a stickler for containing costs. He was successful at RAC, where he helped turn around its core breakdown business before eventually selling it to Aviva.
Harrison's time at Easyjet was less fruitful. He faced a constant battle trying to manage rising fuel costs and fell out spectacularly with Stelios Haji-Ioannou, the company's founder. Stelios is rumoured to have labelled Harrison "over-rated" and criticised him for over-expanding the airline while not delivering sustainable increases in the share price.
Should you buy the shares?
Whitbread's hotels and coffee shops seem to sit well with consumers. Premier Inn's no-frills offer represents good value for money and continues to win a growing share of the British hotel market. It is no surprise therefore that Whitbread continues to invest heavily here. It plans to increase the size of its Premier Inn chain to 65,000 rooms by 2015/2016. Some of the new hotels will have one of the group's restaurant brands on the same site.
But can the good times continue? In February, Whitbread said that like-for-like sales at its hotels had fallen slightly. In recent years it has managed to fill its hotels during quieter midweek and weekend periods with attractive offers. It may have to work even harder in a softer market. This could in turn lower returns on its hotel investments.
Costa Coffee has been an excellent investment for Whitbread, delivering big returns. Despite tough markets, people seem to be buying its coffee in ever-larger numbers. By 2015/2016 the company plans almost to double the number of outlets to 3,500. If that move is successful profits could more than double to over £100m.
While lots more stores will be opened in Britain, places like China will be the main focus of its growth plans. Whitbread is also being innovative with the rolling out of Costa Express Coffee machines. These will be found in places such as motorway service stations, supermarkets and petrol stations. It is also building some drive-through coffee outlets.
However, despite boasting two decent businesses, we don't think the shares are worth buying just now. Whitbread is spending around £325m a year on its assets, but profits growth is expected to slow to 7%-8% next year from around 12% in 2011. This makes the shares unattractive at current levels. Put them on your watch list, and buy on weakness.
The numbers
Stockmarket code: WTB
Share price: 1,845p
Market cap: £3.28bn
Net assets (Sept 2011): £1,125m
Net debt (Sept 2011): £520.1 m
P/e (current year estimate): 14.0 times
Yield (prospective): 2.7%
What the analysts say
Buy: 12
Hold: 7
Sell: 3
Average price target: 1,878p
Directors' shareholdings
A Harrison: 191,106
A Habgood: 50,797
C Rogers: 50,000
