A positive note on Whitbread has failed to lift the hotels and Costa Coffee group’s shares in the current market gloom.
It has fallen 44p to £37.41 - a 1.1% decline which is at least better than the current 1.7% decline on the FTSE 100 - but Morgan Stanley put an overweight rating and £51 price target on the business (abeit down from £56).
The bank reckons the Costa Coffee business has the potential to beat expectations:
A detailed examination highlights multiple levers not on investors’ radar: It is trialling Costa Collect, a pay and collect app which could be transformational (less queuing, more loyalty, extra sales, improved productivity...) and an improved food offer. The food capture rate is 60-70% at its Fresco trial site versus the 42% Costa estate average, and a fresher/healthier range could boost lunch trade where Costa is weak. It also recently put through a price increase and is considering differential pricing, an opportunity to price up in London / travel hubs. Costa also has untapped demand, as around 20% of its UK stores are at full capacity, suggesting upside from additional sites. We estimate around £80m EBIT from these, +50% to Costa’s EBIT, with our forecasts only capturing expansion and 3% like for like sales.
We trim 2017-2019 earnings per share forecasts by around 5% due to weak London hotel trading (post Paris attacks), dull high street trading for Costa, and we assume £10m extra operating costs /development and administrative costs with the new chief executive’s focus here. We assume around 2% like for like sales and revenue per available room in the fourth quarter of 2016 and the full year 2017, with expansion driving all of our forecast earnings per share growth.
We value Costa at £4.2bn (15 times EBITDA), so Whitbread’s enterprise value of £8.4bn implies Hotels & Restaurants is £4.2bn (7 times EBITDA, 9 times PE), or a ‘free’ operating company value if the £5bn real estate were stripped out.
On the food trial, the bank said:
We recently toured the Costa Fresco trial site with management. The concept is more food oriented than a standard Costa, with a kitchen preparing freshly baked products. It aims to capitalise on the blurring of the lines between coffee shops and grab and go outlets such as Pret a Manger and Greggs which are moving into coffee, whilst using Costa’s heritage and strong brand. Currently, Costa’s food offer is oriented to sweet treats and centrally produced paninis, and it underindexes on food in the key lunchtime day part, and is missing out on the trend to more freshly-made and healthier food. The Fresco site is a converted standard Costa store in a very competitive part of Central London, and can be benchmarked against its performance before conversion.
