The market really did not like the third-quarter trading update from Whitbread and it is not immediately apparent why. There are four potential reasons, though. First, the shares, as the graph shows, have been extraordinarily strong since late last year and a so-so update might be taken by investors as a good enough reason to take some profits rather than to increase their holdings.
Second, there is a puzzling lack of any outlook statement. The third-quarter figures run to December 1 and therefore miss out the Christmas period that should have been good for Costa, the coffee chain, as shoppers refreshed themselves; for Premier Inn, as they popped up to town for that shopping; and even for the Beefeater and Brewers Fayre restaurants attached to those budget hotels.
Instead we are told that performances across the business were in line with expectations, which should become apparent when Whitbread reports figures to March 4 in the spring. Premier Inn will not have done as well as four and five-star hotels in London; these will have seen increased tourist numbers, partly because of the weaker pound.
Third and fourth, there are a couple of disappointing numbers within the detailed figures. In restaurants, like-for-like sales fell by 1.5 per cent in the quarter. It is not a good idea to read too much into one quarter’s numbers but there is a lot of choice out there, which may have meant fewer customers of Premier Inns eating at the related restaurant and less trade from locals.
At Premier Inn’s London estate, where the company is the clear market leader, revenue per available room, the main metric the hotel industry uses, fell by 6 per cent. This is a bit better than the performance earlier in the year and probably reflects a 13 per cent rise in the number of hotel rooms, which take time to ramp up to full profitability. Occupancy rates remained at 88 per cent.
The shares, off 159p at £39, sell on almost 16 times earnings. That is not historically expensive and Whitbread is, like Marston’s the other day, well positioned to face any downturn in consumer spending. As an almost pure UK play, though, there is no reason to buy now.
My advice Avoid
Why The trading update is not as bad as the market makes out, while Whitbread is well placed, but it cannot expect to be immune to a UK slowdown
Unilever
Paul Polman, chief executive of Unilever, is so often downbeat in his assessment of market conditions that it is sometimes hard to decide if he is really bearing bad news or just trying not to overpromise. The full-year figures from the consumer goods company, though, do suggest a definite slowdown that is set to continue. That said, there are enough bright spots.
The two main problems are India and Brazil. Unfortunately, these are Unilever’s second and third largest markets by country. The problems in Brazil are well known; rising unemployment and falling earnings do not leave much left to spend on shampoos and other consumer products. In India the policy of pulling large-scale banknotes out of circulation has led to inevitable disruption, with more looming from the general sales tax this summer.
In fact, look at the global trends for the fourth quarter and the main sales fall was in Europe, hit by price inflation and weak consumer demand. Across the group, a 2.2 per cent rise in underlying sales growth is a definite slowdown from the third quarter, up 3.2 per cent, and the first half, up 4.7 per cent, and those problems in India and Brazil will not go away soon.
Margins, though, advanced from 14.8 per cent to 15.3 per cent from cost savings and introducing new, higher-margin products. Unilever has the resilience to continue to grow through any turbulence in individual markets. Off 157½ p at £31.91, they sell on a reasonable 18.5 times earnings.
My advice Buy
Why Fall looks overdone given Unilever’s strengths
Renishaw
The past couple of years have been up and down for Renishaw. There was a huge influx of orders from Far East makers of consumer goods for this producer of precision measuring tools in the year to June 2015. The non-repetition of those orders and the need to invest to fulfil them made 2015-16 a tough 12 months. The fruits have begun to come through in the latest halfway figures.
The company, which has almost all its production in the UK, also got a sharp leg-up from the lower pound, limited by hedging and the need to pass some of the benefits on to customers. Still, revenues, which were up 21 per cent, included a 9 percentage-point gain from currency movements. Pre-tax profits were a touch lower at constant currencies but up 25 per cent on a headline basis to £35.7 million. The core metrology division has a much wider customer and product base now.
The trick with Renishaw shares, off 115p at £27.95 and volatile as ever, is to buy at the low points. At the moment, on 35 times earnings and having come on from below £16 at the start of last year, they look to be on a high.
My advice Avoid
Why Shares are at a high point and look dear
And finally . . .
Petropavlovsk, the gold miner with assets in Russia’s far east, is now back in the land of the living, its $430 million of bank debt having been rescheduled last year, but life is still not easy. Bad weather forced the miner to haul back sharply on 2016 production guidance last month; it has just about hit that revised target with 416,000oz last year. None of this has rescued the company from penny share status, but any rise in the gold price because of global uncertainties cannot be ruled out and would be a benefit.
