Yesterday, the market dropped the share prices of consumer goods group Reckitt Benckiser (LSE: RB) and Premier Inn owner Whitbread (LSE: WTB) after the two FTSE 100 firms released results. However, I’m not put off by the market’s negative response. Indeed, if I had £2,000 to invest, I’d happily buy both stocks right now. Here’s why.
Inns and outs
Whitbread’s plan to demerge its Costa coffee business was pre-empted when the board accepted a too-good-to-refuse £3.9bn offer for the chain from The Coca-Cola Company. The price was equivalent to almost 50% of Whitbread’s enterprise value, while Costa generated less than 25% of group profit.
Whitbread’s used £2.5bn buying back and cancelling its own shares. It now has 27% fewer shares in issue than at the time the Costa deal was announced. I think the buybacks were a shrewd move and will prove to have been at cheap prices if Whitbread successfully delivers its growth plans for Premier Inn, particularly its expansion into Germany.
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On this score, it was encouraging to hear on the post-results conference call that the latest hotel in Hamburg has matured faster than any comparable UK hotel, and that management is “increasingly confident of replicating the UK’s success.”
The company certainly has the firepower to carry out its plans. Yesterday’s results showed cash of £805m on the balance sheet, and borrowings of £882m out of total available facilities of £1.8bn.
Attractive valuation
According to Whitbread’s corporate website, based on data at 1 October, the City consensus forecast for underlying pre-tax profit this year is £374m. At a 19% tax rate this would translate into a bottom-line profit of £303m, and with 133.7m shares in issue, earnings per share of 227p. Buyers of the shares at 4,200p are thus paying 18.5 times forecast earnings.
Despite current challenging market conditions in the UK, I think Whitbread’s valuation is attractive on a long-term view. Meanwhile, in the near term, I wouldn’t be at all surprised if the company received a takeover offer.
Disappointing
Reckitt Benckiser described the Q3 results it unveiled yesterday as “disappointing.” While its hygiene home division, which generates about 35% of group profit, performed well, with like-for-like revenue growth of 4.5%, its larger health division saw a 0.3% fall in revenue, primarily due to issues in the US and China.
Chief executive Laxman Narasimhan said: “This performance is a reflection of an extended period of significant change and disruption in the company.”
Discount valuation
Since the start of 2018, under its RB 2.0 project, the company has been transforming hygiene home and health into two structurally independent business units, a process expected to be completed by mid-2020.
I’ve been saying for a while I think there’s a strong case for formally splitting the company, in the same way Whitbread had planned to demerge Costa. The latest results add to my conviction, and an announcement this week of a new chief financial officer joining the company by April adds to my hope it will happen.
At a share price of 5,800p, RB is trading at 16.5 times forecast 2020 earnings, compared with a sector rating of around 20 times. I could see the company closing the discount over time on improved operational performance, or moving to a premium in short order if it announces a demerger next year.
