Whitbread looks to have great value

Nov 4 2009 Andrew Miller, The Journal

OVER the past year the leisure sector has taken a battering. It should come as no surprise that consumers have curbed their discretionary spending – but is it all doom and gloom and 2-for-1 offers for the leisure sector for the foreseeable future?

Given that unemployment is likely to continue to rise in the short term, we believe consumers will continue to look for value when making purchases.

While this is bad news for the premium end of the market, it could provide a significant opportunity for Whitbread, the owner of the Premier Inn and restaurant chains such as Beefeater and Brewers Fayre. Whitbread is also of course the owner of Costa Coffee, a business which should benefit from any signs that the economy has started to improve.

In essence, we like Whitbread because we see potential for significant upside potential to earnings forecasts on a two- to three-year view. This is largely associated with expansion plans at Premier Inn, which has benefited from its clear “value” positioning.

At the recent results, the management announced a pipeline of 10,000 rooms for Premier Inn – the first time the group has identified a pipeline, although it emphasised that this number is not static. While Whitbread’s management does not believe that now is the time to be more aggressive, it has suggested that it will look to become so when revenue per available room begins to recover. We have assessed the likely effect of the additional rooms at Premier Inn on pre-tax profits, and believe that if all 10,000 were to open over the next three years, our models would understate pre-tax profit by at least 7%.

However, even in the absence of such activity, we think Whitbread still offers an attractive valuation. Whitbread also trades at around a 45% discount to the hotel group average, making it one of the most cheaply valued stocks in the entire European leisure sector.

Looking to 2010, we believe that there are good grounds for thinking that “big ticket” discretionary items such as holidays will see better demand and investors could do worse than take a look at TUI Travel. Of course, things remain tough - recent data showed that Winter 2009/2010 volumes are down 21% versus capacity cuts of 15% – but interestingly pricing remained strong at +11%. In the short term, TUI may need to cut capacity further, but as one of the few remaining incumbents in the sector it should be well positioned once the world emerges from recession. TUI is cheap, has an attractive dividend yield and is sensitive to any economic recovery – for those reasons it is an attractive stock in our opinion, and a key constituent of our UK portfolio.

Andrew Miller is regional office head at Barclays Wealth in Newcastle