When Andy Harrison decamped from easyJet to Whitbread four years ago, there was speculation that one of the first things he would do would be to review the leisure group’s continued ownership of its two very distinct businesses: budget hotels and premium coffee shops.
As it turned out, by the time he had completed a short handover with Alan Parker, he had already completed the review and as chief executive he expounded the benefits of having two strong core businesses, with a third — pub-restaurants — acting as an adjunct to Premier Inn.
Since then, Mr Harrison has been consistent on the matter. While conceding that there are few synergies between the two brands, so long as both continue to fire on all cylinders under the Whitbread aegis he sees no reason to split them up. One of the main reasons why companies tend to go down the demerger route is when their share price suffers a conglomerate discount. Whitbread’s performance under Mr Harrison suggests that the company has benefited from having the two brands under its roof, soaring from £17 to £45.69. Although Costa is still by far the smaller of the two, its strong growth during the recession has counterbalanced periods of softer trading at Premier Inn.
The issue of decoupling refuses to go away, however. Yesterday, Simon French, at Cenkos, became the latest analyst to dissect the theory, arguing that, once Costa’s international operations return to profit, the “likelihood of a demerger will increase”.
Whitbread is no stranger to selling things, of course. Under Mr Parker’s tenure, it sold David Lloyd Leisure and interests in TGI Friday’s, Britvic and Marriott Hotels UK, while David Thomas, his predecessor, offloaded most of its pub and brewing operations.
According to a report by Deloitte and The Edge Consulting Group, corporate break-ups are on a sharp upwards trend amid generally positive returns for both parties in the demerger. When discussing the issue, as he will do yet again today when he presents another strong trading update, Mr Harrison always emphasises “never say never”. A demerger will happen one day — just not yet.
2015 sales £2.6bn
Ebitda £666m
£8.3bn Whitbread’s market value
My advice Long-term hold
Why A high-quality company that has prived resilient through the downturn. Medium-term demerger prospect supports price
Ask Geoff Drabble what his lucky number is and the chances are the Ashtead Group chief executive will say 33. The plant and equipment hire group yesterday followed up its 33 per cent pre-tax profits increase in the first quarter with a 33 per cent jump in second-quarter profits, pushing underlying half-year profits 33 per cent higher to £265.5 million. As a result, it has declared an interim dividend of 3p, a rise of — you guessed it — 33 per cent.
Apart from the numerical repetition, it is also the second quarter in a row that Ashtead has raised full-year guidance, although it is not saying by how much it will beat the £452 million consensus. In a further sign of confidence, it also upped its full-year estimate for capital expenditure to between £925 million and £975 million as it invests in “the profitable growth opportunities evident in our markets”.
The group is benefiting from having 85 per cent of its business in America, where the construction recovery is in full swing. Ashtead is also winning market share and its shares leapt 9.1 per cent to a record high of £11.75, up 59 per cent on this time last year.
Revenue £896m
Dividend +33%
My advice Take profits
Why Recent stellar share rise could pause for breath
Any punters looking for an alternative home for funds freed up by the sale of Daisy Group have at least one clear option. The company’s sparring partner Alternative Networks — another mid-cap, acquisitive telecoms and technology company — offers a natural option for anyone left out of the daisy chain.
Like Daisy, Alternative is always on the hunt for acquisitions. It bagged two significant deals this year — Control Circle and Intercept — which pushed revenue growth in the year to the end of September up 20 per cent and operating profit up 23 per cent. However, organic growth was a little less impressive, at 1 per cent, while pre-tax profit dipped by 17 per cent because of acquisition costs and higher depreciation.
Yet the Alternative story is increasingly one of cash and dividends, both of which excelled during the year. Cash generation was 99 per cent higher, a slightly lower rate than in the previous year but impressive nonetheless, while dividends increased 12 per cent — stripping out the impact of a one-off payment in 2013 — to 14½p a share.
The performance in the second half was stronger and pointed to a strong performance in 2015 with a record order book.
Like Daisy, Alternative wants to expand into higher-growth areas such as web-hosting and managed services and, having cut debt substantially, it could be set for a number of deals. The FinnCap target price of 605p looks a stretch, but it is trading at 12.6 times, a modest discount to its historical range, so should gain ground.
Revenue £137.9m
Dividend 14 ½p
My advice Buy for income
Why Acquisitions pay off and dividend continues to grow
And finally . . .
Hats off to Tim Martin. His decision to stop selling Heineken products in all 926 of his pubs may seem a tad petulant, but you can guarantee that the JD Wetherspoon chairman and founder has thought very carefully about his actions. Word is he’s preparing to meet the top bods at Heineken UK and, given the threat to the Dutch brewer’s own pub business from the surprise breaking of the beer tie, it would be no surprise to see the mullet-haired millionaire come away with an improved beer supply deal.
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