It’s probably stretching it a little to imagine that Whitbread’s shareholders are starting to rue the sale of Costa Coffee. The £3.9 billion that Coca-Cola paid for the high street chain in 2018 represented a price tag so rich and frothy that it would have been almost perverse to reject it; some of the leisure group’s biggest shareholders had been pushing for a disposal or spin-off, after all.
Yet it would be of little surprise if some of Whitbread’s owners are beginning to ask themselves what they’ve been left with — being the operator of Premier Inn budget hotels in Britain and Germany, with a smattering in the Middle East.
Whitbread was founded as a brewery in 1742 and during its history it has bought and sold assets ranging from Marriott Hotels to TGI Fridays. After the sale of Costa, the FTSE 100 constituent owns and operates 810 Premier Inn hotels in the UK, with 77,263 rooms. It has opened three hotels in Germany as part of plans to operate 48 properties with about 8,500 rooms. That total includes 22 hotels acquired through two acquisitions, one in 2018 and the second last year.
It has seven more hotels in the Middle East, including four in Dubai, and operates pub restaurants, including 160 under the Brewers Fayre brand, 165 trading as Beefeater and 80 as Table Table. Analysts are forecasting that over the year to the end of next month it will make underlying pre-tax profits excluding lease liabilities of about £390 million on revenues of just over £2 billion.
As part of an expansion plan put in place after the Costa sale by Alison Brittain, 54, chief executive, Whitbread aims to open about 3,000 rooms in the UK this year, plus 2,000 or so in Germany. Her intention is to make the company the most successful budget hotel operator in its chosen markets, capitalising on the apparent demand for affordable accommodation from business and leisure travellers.
Unfortunately, a frail economy has complicated matters. In a disappointing update last week, Whitbread said that underlying sales in the UK had fallen by 1.3 per cent over the 13 weeks to November 28, and by 2.2 per cent over the 39 weeks to the same date. Positive sales of food and drink in its restaurants have failed to offset a fall in hotel bookings, which is more pronounced in Premier Inn’s regional outlets than it is in London. Within this, the dynamic seems to be that overnight stays by business travellers in the UK’s regions have suffered disproportionately amid the weak economic climate, while sales to leisure and tourist travellers, particularly in London, have been more resilient.
Add in Germany and the Middle East and gross sales look modestly better, up 1 per cent during the third quarter but only 0.3 per cent higher over the 39-week period.
In many ways, a bet on Whitbread is a bet on the reinvigoration of the British and, indeed, the German economies, something that, at least on home soil, could be fuelled by Boris Johnson’s decisive majority and the return of business investment once Brexit is a reality.
For its part, Whitbread is continuing its openings programme but is cautious about the demand for its hotels over the coming year, particularly among business people in the regions.
The uncertainty around the economy is clearly weighing on the shares, which were off 75p, or 1.7 per cent, at £44.29 yesterday and have moved little since this column recommended avoiding them last July. Those shares are valued at just over 22 times Stifel’s forecast earnings for a dividend yield of just under 2.3 per cent. In truth, they are no more attractive now than they were before.
ADVICE Avoid
WHY Frailties in the British and German economies make predicting stronger sales gains highly difficult
Gamma Communications
Gamma Communications spotted early where the provision of telephony services was going: away from traditional landlines and public networks, on to the internet and, most recently, into the cloud.
The company was founded in 2001, shortly after the dotcom crash, when it bought the remains of Atlantic Telecom, the former market star that collapsed from its debts.
Having reinvented itself as a communications specialist for businesses in 2006, it was listed on Aim in 2014 with a valuation of more than £165 million. While the quote on London’s junior market remains, Gamma’s market worth has swollen to nearly £1.3 billion.
The business is built on providing internet-based phone and broadband services to small and mid-sized companies, using the cloud to improve sound quality in phone calls. The method also makes line rental typically about 40 per cent cheaper. It sells to larger businesses and the public sector directly, with customers including HM Revenue & Customs. and Inchcape, the motor retailer.
Gamma has been growing rapidly, increasing its customer numbers by 10 per cent in each of its two main product offerings during the six months to the end of June, with a combined 1.3 million accounts. This translated into a 15 per cent growth in revenues to £158.2 million and a 40 per cent increase in pre-tax profit to £21.7 million over the period.
With a market share in its biggest online phones product of 27 per cent, the group has expanded overseas, buying two small companies in the Netherlands in 2018, and it has plans to grow in other countries.
This company looks like a quiet phenomenon, repeatedly upgrading its profit forecasts and turning in stellar growth figures while creating options in overseas markets for the future. Its shares, up 20p, or 1.5 per cent, to £13.80 yesterday, have more than doubled in value in the past two years.
They are not cheap, trading at 33.2 times Investec’s forecast earnings for a dividend yield of a little below 0.9 per cent. Nonetheless, for investors happy with capital growth rather than income, they are a solid “buy”.
ADVICE Buy
WHY Quality, high-growth business with lots of overseas potential
