Leading analyst Jamie Rollo at Morgan Stanley believes that Whitbread is likely to separate Costa at some point with the arguments in favour are well rehearsed, but that the valuation argument is thinning.
He said that the company’s management are under no pressure to go down this route while performance remains strong.
Rollo said: “Costa is now self-funding; a demerger would give shareholders the choice to own a pure fast-growing coffee chain; Costa is large enough to be separately listed; and separation would close the valuation discount in the share price. But the valuation argument is thinning. We do not see a conglomerate discount in Whitbread’s valuation any more.
“European hotel operators trade on an average 2013e EV/EBITDA of 9.5x, with managed pub operators on 7-8x, and Starbucks and QSR chains on 11.5x and 8.5x 2013e. If we assume hotels & pubs are worth 9x F2014 EBITDA, it implies Costa is being valued at £2.1bn, which is 26x F2014 P/E.
“The timing is not ideal. Whitbread has said it wants to prove itself overseas and change the mix of its business away from the UK. We think it may need to increase its investment materially, and potentially take on more risk via equity stores rather than franchising or JV.
“We also think Whitbread management feel under little pressure to do this given the strong performance of the business, both operationally and via the share price. Certainly, shareholders are not jumping up and down, and it might take a period of share price underperformance and / or investor frustration for management to consider this option.
“Management sees Costa as a core business. It argues that it should remain part of Whitbread in order to maximise opportunities for international expansion, and that Costa needs the access to capital that Whitbread can provide.”
