Leading analysts at Morgan Stanley have issued a note arguing that they believe there’s room for 530 more Costa sites in the UK despite weak like-for-like sales and mounting concern over market saturation. They also didn’t rule out Costa slowing its expansion.

The note stated: “With weak like-for-like sales and mounting concern over market saturation, we look into how much more room Costa Coffee has to expand in the UK. Morgan Stanley’s AlphaWise team sourced the locations of Costa and its competitors, split the market into six clusters, and assessed its potential to ‘reinforce’ (existing presence but low market share), ‘invade’ (no presence, but branded competition established), and ‘colonise’ (no branded coffee shops but a market opportunity based on minimum population levels).

“We think Costa has room for around 530 additional stores in the UK, equating to circa four years of growth. Our estate analysis shows that Costa has greatest market share in smaller wards in the UK: almost 70% share in the smallest towns compared to 20% in the most active urban centres. Over 60% of the expansion opportunity (>300 stores) would be for Costa to gain a presence where its competitors have one and it does not, suggesting low cannibalisation risk. A further 30% (>150 stores) could be gained by reinforcing its position in areas where it already has a presence, but its market share is lower than we would expect. Minimum 25% upside potential to Ebit.

“This suggests circa 2,600 stores, close to its target of 2,500. It is also equivalent to Starbucks’ density in the US. Assuming current average UK equity/franchise Costa store economics of £70k Ebit, these units could add £37m or 25% to Ebit, but 50% more if they were all equity stores. Our work does not consider upside from more sites at travel hubs and drive-thrus which are larger units with less high street exposure. And we exclude upside from Express machines and International (where there is much to prove). But much relies on like-for-like sales. If like-for-like sales weaken further, whether due to the UK economy, the circa 40% of stores on the high street, or competition, we wouldn’t rule out Costa slowing its expansion, despite there being a clear opportunity.

“Shares are pricing in minimal growth. Whitbread trades at a circa 35% discount to its sum of the parts proxy on price to earnings. The share price implies 4x F19e Ebitda for Costa (stripping out Premier Inn at 11x), suggesting zero growth priced in. Or applying our target 10x multiple to Costa implies 8x for Premier Inn, low for a property-backed hotelier.”