Premier Inn owner Whitbread (LSE: WTB) sold its Costa Coffee business to The Coca-Cola Company for £3.9bn earlier this year. Meanwhile, AIM-listed tech company Telit Communications (LSE: TCM), which released its annual results today, recently completed the sale of its automotive solutions division for $105m.
Such asset sales and cash receipts can prove to be great news for a company and its shareholders, though this is very much dependent on the circumstances of the disposal and the use of the proceeds. Here, I’ll give my assessment of the deals Whitbread and Telit have done, and my view on the two companies’ prospects.
Focus
Coca-Cola’s £3.9bn offer for Costa was widely considered a generous price. The sale served to hasten and simplify what I already felt would be a value-unlocking separation of Whitbread’s coffee and hotel chains.
Management can now focus on growing the Premier Inn business. Its target is to extend the current UK network of 74,000 rooms to over 110,000 rooms. If that’s not exciting enough, it’s planning on replicating the scale and success of the UK business in Germany.
Long growth runway
I found Whitbread’s research and rationale for expanding in Germany — as set out at a Capital Markets Day in February — compelling. Limited design changes are required to localise the Premier Inn product for the domestic German traveller, and management sees long-term potential for a network of over 170,000 rooms in the country.
In view of the long growth runway, and Premier’s history of performing well in a recession, I believe a rating of 20 times 12-month forecast earnings represents excellent value for long-term investors. As such, I rate the stock a ‘buy’.
Baggage
Telit Communications, which describes itself as “a global leader in Internet of Things enablement,” is a company with a lot of unsavoury baggage. It recently settled one legacy claim against it for near to $1m, but remains embroiled in historical tax disputes in Israel and Italy. It’s also under investigation by the UK’s Financial Conduct Authority over the accuracy of certain stock market announcements made in 2017.
However, with the board of directors having changed entirely since the events in question, and the company having just netted $105m cash from the aforementioned disposal, is now the time to reconsider my previously bearish position on the stock?
Concrete numbers
In today’s results for the year ended 31 December, Telit reported a 14% increase in revenue to $427.5m, a 66% rise in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $30.1m, and a statutory pre-tax loss that narrowed to $39.8m from the prior year’s $56.8m.
Disappointingly, the company provided no pro forma version of the results without the now-disposed-of automotive solutions division. We know that in 2017 this division was the relative jewel in Telit’s crown, responsible for $63.2m (17%) of group revenue, but $10.1m (well over half, excluding allocated overhead costs) of group EBITDA. Unfortunately, the company hasn’t given us these numbers for 2018, and so we have no real idea how the rest of the business (the continuing operations) performed on a standalone basis.
Management said it now has the resources to accelerate its strategy for profitable growth, and sounded confident about the future. However, until we’ve had some concrete numbers on the performance of the retained business, I’m still inclined to view this as a stock to avoid.
