WHITBREAD
Forecast Costa sales by 2018 £2.5bn
As Andy Harrison, the chief executive of Whitbread, admits August is a funny month, led astray by the weather and holiday patterns. There is already evidence, from Merlin Entertainments, owner of Madame Tussauds and the London Dungeon, that the low euro and the economic recovery is tempting Brits to go abroad while making the capital less attractive to continental visitors.
Sales across the group that month, taking in Premier Inns and Costa coffee, rose by just short of 1 per cent, against an exceptional performance of 8.8 per cent last year. The second-quarter performance for the two businesses therefore lagged the first quarter and was a little below some City expectations. Pub restaurants, most of them situated next to Premier Inns, were largely flat.
Those quarterly numbers should be no big deal, then, but the shares fell 75p to £46.36. Since I called the top of the market in April, Whitbread shares have edged back from £53. The problem is that they still sell on a hefty 19 times earnings, which seems hard to justify unless you expect a step change in that growth rate.
To be fair, more Premier Inn rooms will open this year than in any previous one. Costa openings are scaled back a touch from earlier forecasts, but the market does not seem to have reached saturation. Whitbread will invest £700 million this year, reflecting a move into Germany and the need to scale up in London.
The question is where the company is going under Alison Brittain, who starts as its chief executive in January. Some have hoped that Costa could be spun off. Whitbread could sell those pub restaurants. It could step up its relatively cautious international expansion — Costa sales overseas were ahead by almost 14 per cent in the quarter. It could even embark on an acquisition to add another leg.
This last brings its obvious dangers, and that capital spending programme would seem the safer option, allowing Whitbread to reach the targets for the two main businesses already set out. This is a well managed business. At the current level though and, given the uncertainties over the new chief executive, it is hard to get excited about a purchase.
MY ADVICE Avoid for now
WHY Whitbread is well managed and has options for steady growth, but the high multiple the shares trade on is hard to justify
AMLIN
Value of Japanese bid £3.47bn
The Japanese have traditionally not been interested in fighting it out with allcomers when they alight on a takeover prospect, and the price Mitsui Sumitomo is paying for Amlin looks like a knockout blow. It is paying 2.4 times the most recent net tangible asset figure, or £3.47 billion — for comparison, earlier bids in the sector for Brit and for Catlin, themselves seen as generous, have been in the area of 1.6 times.
This is one of those deals that is designed to allow the bidder to gain a greater global reach, in Amlin’s case giving it a base at Lloyd’s and exposure to the United States. Other Japanese insurers have also been buying, mainly in America, while the supply of quoted Lloyd’s vehicles is in danger of drying up with about four left at the last count.
I have signalled the sector’s vulnerability to foreign takeovers in the past, with Amlin seen as one of the most exposed because of its strong market position. Though most companies tend to specialise in particular areas, the market generally has been hit by an influx of capital seeking a decent return, so forcing down rates, which has driven the need to achieve cost savings.
Amlin was indicating only a couple of weeks ago that it was not for sale but, in the end, everything with a quote is. Management are staying and it is a friendly deal all round, understandably at that price. The shares, up 162½p at 655p, are a little below the 670p a share on offer, along with the 8.4p dividend. As ever, investors can take profits in the market or hang on until next year for the full terms.
MY ADVICE Hold
WHY Bid terms look full and attractive
ASHMORE GROUP
Assets under management $58.9bn
Ashmore’s results to the end of June do not contain much on current trading but none of it will have been good. It is a fund manager focused on emerging markets and investors have inevitably been spooked by the collapse in China. Over the year, assets under management fell by 21 per cent to $58.9 billion, $9.5 billion of the decrease coming from investors pulling their money out and $6 billion from the fall in the value of investments.
Ashmore points out that the majority of funds outperformed the relative benchmarks but the first quarter update, due next month, will probably contain a further fall in total funds. The company says it is tentatively investing again, taking a view that some sort of bottom has been reached, but there is plainly no guarantee of this.
The shares have fallen about 330p from the start of June, though they added 12¼p to 257p yesterday. This means they yield about 6.4 per cent, a payment not much covered by earnings. With almost half the shares owned by staff, though, that dividend looks safe, which suggests that they are worth holding for the income, no matter how long the recovery in those emerging markets takes.
MY ADVICE Hold for income
WHY Recovery is uncertain, but dividend yield is high
And finally . . .
That DS Smith shares are about where they were when I last tipped them at the end of June is something of an achievement in these markets.
The packaging company is continuing to raise volumes at above GDP growth and it is seeing gains from price rises in raw materials. Earlier acquisitions are bedding in and others are being sought. DS Smith has a reputation for being a dull but safe investment, a consolidator achieving slow but reliable growth; that reputation looks increasingly deserved.
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