Shares in FTSE 100 constituent Whitbread (LSE: WTB) were down around 1% in trading this morning as investors digested the (not totally unexpected) news that its Costa coffee chain would be demerged from the company.
According to CEO Alison Brittain, the demerger will be “pursued as fast as practical” and completed “within 24 months”. In her view, the strategy allows management to “create two high-quality independent businesses” that will “be able to take advantage of the structural growth opportunities” both in the UK and abroad. The demerger was deemed appropriate at the current time “to optimise value for shareholders” and not, we’re encouraged to believe, the result of recent pressure by activist investors Elliott Advisers and Sachem Head who now own roughly 10% of the £7.7bn cap.
Once separated, Costa will become “a listed entity in its own right“, the “clear market leader in the UK” and a company with a strong international growth strategy. Whitbread will retain Premier Inn — the largest hotel business in the UK — under its flag.
Regardless of who you believe, I’m inclined to think this move makes a lot of sense. Although not guaranteed, evidence shows that spin-offs can often be a catalyst for improved efficiency in both companies and, consequently, generate better returns for their owners in the long run.
With today’s announcement grabbing the headlines, however, it’s easy to forget that Whitbread’s latest set of full-year numbers were also fairly decent.
Lest we forget…
Total revenue rose 6.1% to just under £3.3bn in the last financial year with market share gains achieved by both of the company’s biggest brands. Pre-tax profit increased 6.4% to £548m.
Premier Inn continues to perform well in the UK with solid growth in revenue and operating profit. Expansion into Germany also continues apace with a new target of 31 hotels (and 5,720 rooms) now set for 2021.
Elsewhere, the buyout of one of its two joint-venture partners during the reporting period has given the business “full control” of its Costa stores outside of Bejiing. It is now targeting 1,200 stores in China by 2022.
Positively, returns on capital — often used as a measure of a company’s quality — were also far from shabby. Premier Inn came in at 13.4%, Costa at a superb 46% and Whitbread as a whole at 15.4%.
Given that inflationary pressures are likely to continue impacting the hospitality industry over the medium term, news that the firm had achieved savings of £105m to date through its efficiency programme should please shareholders. The company now feels it can increase its target to £250m (from £150m), “with £100m delivered over the next two years“. Although debt has been climbing in recent years, Whitbread’s balance sheet still looks fine (net debt of £833m at the end of 2017/18).
Despite all this, the company stated that it does “remain cautious on the consumer environment” as a result of difficulties experienced by many retailers on the high street and that profit growth in the short term “may be lower than in previous years“. This stance feels eminently sensible.
Whitbread’s shares have enjoyed a stellar run over since the start of the month, rising 15%. Taking into account today’s numbers and the possibility of further value being realised from the demerger, I’d be inclined to say that the company is certainly worthy of consideration by new investors once a likely period of profit-taking has finished.
