A sale of Whitbread’s restaurants would be a “more logical project” for the leisure group than disposing of Costa Coffee, leading sector analyst Geof Collyer has argued.
Collyer, of Deutsche Bank, listed a possible sale of its restaurant arm as an upside risk, saying that the move should lead to a re-rating and a reduction of Whitbread’s pension deficit
Meanwhile, he stood by his view that there’s more benefit for shareholders in Whitbread keeping its Costa division than selling or demerging now.
“We can see why some may get excited by the prospect of 15x EBITDA for a division of a group trading on nearly 10x, but we would point out that the FY’12 EBITA from Costa was 25% above our FY’12 forecast published in the October 2010 note, and that our FY’13 forecast for Costa now is 50% higher than it was back in 2010.
“As importantly, our FY’16E milestone year forecast is 170% above the FY’11A reported Costa EBITA. History suggests that Costa surprises positively over time so why sell now, and give all that upside to someone else?”
He added: “If the board was to conclude that a further structuring of the group was the right course of action in the near term, we see selling off restaurants as a more logical project as opposed to demerging or selling off Costa. It is clear how Costa will create value for Whitbread’s shareholders.”
In May, Collyer highlighted how the top line performance of the restaurant division against its peer group is “trackable” but the profits aren’t and haven’t been for four years.
Back in 2010, he suggested that Mitchells & Butlers (M&B), the managed operator, is “very interested” in the division. In the new note released this week, Collyer said he didn’t see M&B as a potential buyer at present, although Greene King may have a possible interest.
Collyer said another upside risk for investing in Whitbread would be a “significant improvement in the pace of achievement of a mature RevPAR for the group’s hotel portfolio through more aggressive dynamic pricing” - this could be worth around 20% to group pre-tax profit over the next five years, he argued.
Collyer also listed five downside risks: a slowdown in the eating-out market, which accounts for about 30% of group profits; a price war in budget hotels; an inability to achieve the development pipeline for the hotel business; a failure to re-invigorate the pub division; greater than expected cost pressures, for example from further national minimum wage increases, utility and food costs.
