M&C Report takes a closer look at the Q2 update from Whitbread, including the factors behind the improvement in performance across its pub restaurants, competition in the coffee market, cost inputs and Asian expansion plans, Travelodge fallout, plus analyst reaction. Costa Coffee Chris Rogers, the incoming managing director of Costa and current group finance director, said that there was a umber of factors behind the continued growth in sales across the coffee chain. He said: “The coffee culture in the UK is strong and if you asked Starbucks and Caffe Nero they would both say that it is a good market in the UK, as evidenced by the amount of new people looking to enter the sector. Continued innovation in terms of product and store design has aided performance, which was up against a period where we successfully launched our ice cold drinks range.” Rogers said that due to forward buying, benefits felt by coffee price reduction to be delayed, although the chain had seen some recent stabilisation. The group recently signed a franchise agreement to enter three new markets in Asia - Thailand, Singapore and Cambodia - as part of an expansion programme across South East Asia over the next few years. Rogers said that the group would look to open 100 sites across these three markets over the next five years, but that China remains its main Asian focus. Rogers said: “These markets are quite small beer compared to what we hope to achieve in China. Site like-for-like growth in H1 is running at around 20% and we have recently passed the 200 mark in the country. Restaurants Chief executive Andy Harrison said that the switch in half term from Q1 last year to Q2 2012 had benefited this year’s period by c1.4% pointing to an underlying run rate of +3.5%. He said: “Performance was driven by local markets, the success of Buffet Table, plus an increase in breakfast and coffee sales, both of which have good margins.” Travelodge Harrison said that the group had picked up a number of sites from rival Travelodge’s development pipeline, which translated to around 600 rooms and that they were looking at a Travelodge pre + post CVA helps WTB on margin, WTB picked up 500 to 600 Travelodge rooms Opened 4000 rooms last year 4,500 this year, on target to hit 65,000 but no deadline given on when Analyst reaction Wynn Ellis at Numis said: “We have upgraded our FY13E (Feb) PBT forecast from £338m to £349m (+3.2%) following today's positive Q2 IMS update. We believe that consensus was c.£342m and we would expect upgrades to consensus also. We remain encouraged by the structural, organic growth opportunities for budget hotels in the UK, and for Premier Inn (PI) in particular, and by further growth opportunities for Costa in both UK and International markets. “Pub Restaurants, There was welcome improvement in performance in Q1 which has continued into Q2 with LFLs up 3.4% in the first 24 weeks. Comps get a bit tougher in H2 but WTB seems have to be getting some traction with its value offers in the local market and is making good progress with coffee and breakfast sales across the estates. The improved LFL performance is not at the cost of margins, which we believe are being maintained. “Costa continues to trade very well with LFLs up 5.7% in Q2. Management believes that the poor weather may have boosted LFLs by 1-1.5% over the summer, but it is also clear to us that the Olympics were a drag on visitor numbers in London. The continued success of Costa, we believe, is due to a number of factors, including product and store format innovation but it is also apparent that the coffee market in the UK remains frothy.” Simon French at Panmure Gordon said: “Whitbread has reported its Q2 IMS better than our expectations, although each division benefitted from ‘one-offs’ that boosted revenue growth. Premier Inn total RevPar was +1.9% against our expectation of flat (Q1: +2.9%) Restaurants LFL sales were +4.9% versus our expectation of -1.0% (Q1: +2.1%) and Costa LFL sales were +5.7% versus our expectation of +2.0% (Q1: +8.4%). The group reports that variable trading month by month continues and we expect no material change to consensus expectations of £339.7m PBT (145.3p EPS). The stock trades on a CY 2012E P/E of 15.1x and an adjusted EV/EBITDAR of 8.7x whilst yielding 2.5%. Our profit forecast is at the bottom of the range and we remain cautious and reiterate our Hold recommendation, but roll our valuation year onto FY 2014E leading to an increase in our target price to 1916p (1789p), implying c9% downside potential.” James Ainley at Citi Research said: “Restaurants Q2 LFL growth is +4.9% (Citi 0.0%, Q1 +2.1%). The switch in half term from Q1 to Q2 this year benefits Q2 by c1.4% pointing to an underlying run rate of +3.5%. This is much better than the relatively flat Peach Coffer industry data seen in the last 2 months (+0.6%) reflecting very strong covers growth (+8.6% in H1) driven by new breakfasts and buffet offers. We estimate that this business generates c10% of group EBIT. Costa. Q2 LFL growth is +5.7% (Citi +3.5%, Q1 +8.4%) with UK equity stores +7.1% in H2 overall. The strong performance was helped by poor UK weather. The group is on track to open 350 stores, as expected. We estimate that this business generates c20% of group EBIT. We expect consensus forecasts to be little changed. Although the Restaurants and Costa performances are very strong, PI still generates c70% of group EBIT and remains in line with expectations.”