One must probably add Whitbread to the list of shares that will bounce if we vote tomorrow to stay in the EU. The shares have been volatile of late amid fears over the London hotel market, while the main engine of growth, the Costa coffee chain, was showing some signs of slowing down at the end of the last financial year, perhaps affected by the mild weather and lower footfall on the high street.
The first-quarter figures were something of a relief. In headline terms, Premier Inn grew by 8 per cent, helped by new room openings — about 3,600 in the final quarter of last year to the end of February and a further 4,000 to 4,500 expected in this financial year.
Revenue per room (revpar), the main measure in the hotels industry, was down by 0.5 per cent, or 3 per cent in London, hit by extensions to existing hotels, with new rooms inevitably taking time to mature. In hotels that had not been extended, revpar was actually up. In like-for-like terms, sales were up, which at least suggests that the budget hotel chain is still taking market share from rivals.
The Costa bandwagon keeps on rolling. Many have suspected in the past that it might be grinding to a halt, wrongly each time. Again, total sales reflect new openings, while like-for-likes are comfortably up. Costa sees return on capital of about 50 per cent for each store, which indicates how profitable it is to open a hole in the wall on the high street and sell expensive coffee out of it.
The third division, the restaurant side, is keeping its head above water in difficult markets. Chatter about a break-up of the group, inspired by the arrival of Alison Brittain as chief executive, seems to have died down.
Ms Brittain is sticking to ambitious targets for 2020, to get Premier Inn from 65,000 rooms to 85,000 and to grow Costa sales by £1 billion from £1.6 billion at present. Those seem achievable: the budget hotel market is still fragmented, heaven knows when we will lose our taste for Costa coffee and the overseas side gives scope for expansion.
This makes Whitbread one of the most reliable stocks around, even if at pushing £55 a year ago the shares were plainly overvalued. Up 67p at £41.08, they sell on 16 times’ earnings, which suggests good long-term value.
MY ADVICE Buy
WHY The shares are well back from their peak and look good value. The long-term growth of Premier Inn and Costa will be there in due course
Chemring
Given the woeful investment that shares in Chemring have been since the autumn, shareholders are entitled to ask whether all the bad news is in the public domain now. They stood at or around £2 right up to October; they dropped 24½p to 115¼p yesterday after news that the outcome for the year to the end of October would be below market expectations.
In that period those shareholders have had to subscribe for fresh shares in an £81 million rights issue at 94p a share to repair the balance sheet. Halfway figures present a dismal prospect, revenues of £180 million translating into operating profits of only £3.8 million.
There are two problems. One involves some health and safety issues in Australia that have restricted production, now resolved. The main issue has been further delays to a contract to make 40mm ammunition for an unnamed country in the Middle East, generally thought to be Saudi Arabia. At more than £100 million, this is a sizeable chunk of an order book running at almost £600 million. The delay of only a matter of weeks pushed some earnings from that contract into the second half, which, given its size, is significant but not a long-term hitch.
One gets the impression that Chemring is taking a cautious view on the second half and that it could turn out better than expected. There is, sensibly, no dividend. On that basis, the share price fall, putting them on 11 times’ reduced earnings, looks overdone bearing in mind the long-term prospects from the US defence sector.
MY ADVICE Buy
WHY Share price fall looks like an over-reaction
Petrofac
The best that can be said for Petrofac’s trading update is that it does not contain any more serious shocks. The oil services company is still extricating itself from a couple of duff contracts, the Laggan-Tormore gas plant on Shetland and the Greater Stella Area project in the North Sea. All the red ink from these should be contained in the figures for this year and outside these profits should come in line with previous guidance, at about $445 million.
This means that the dividend is well enough covered this year. The shares, off 3½p at 752½p, will still have the support of a 6 per cent yield.
The backlog of orders declined by almost $2 billion in the first five months of this year to $18.9 billion and Petrofac is seeing an understandable slowing in new work. Some project awards are likely to slip into the latter half of this year or into 2017, even if Middle East clients are inclined to keep spending, whatever the price of oil.
The shares have been falling sharply since the spring and sell on 12 times’ earnings. This looks low, historically, but I’m not sure I see any immediate catalyst for a recovery.
MY ADVICE Avoid
WHY Hiatus in orders could last until next year
And finally...
Like several other outsourcers, Capita’s business plan requires organic revenue growth to be topped up by acquisitions. There had been concerns that the company was not seeing enough of those, especially after it lost out in the race to acquire Xchanging, the business services provider, late last year. Capita announced the purchase of a provider of IT services yesterday. At £357 million, Trustmarque Solutions is not a huge deal, but it fits well with Capita’s own existing technology provider.
