Ever since Whitbread sold off its Costa Coffee chain to The Coca-Cola Company I’ve lost interest in the firm. With fast-growing Costa gone, Whitbread’s remaining hotels and restaurants businesses look over-priced by the valuation to me, given that operations are so cyclical.
Trading well and reducing debt
Instead, I’d rather invest in EI Group (LSE: EIG), which is active in the hospitality space by running pubs. Unlike Whitbread, EI sports a modest-looking valuation. But the shares have been doing well, up almost 70% in the past year alone. Even now, the price-to-tangible-book value is running just below 0.8, suggesting the company remains far from being over-valued.
I’d be the first to admit that the pub business is bound to possess a lot of cyclicality of its own, and the general decline of the pub industry in the UK has been well documented. Indeed, you don’t have to travel far just about anywhere in the country to see repurposed or shuttered and weed-bound ex-pubs. Surely, I’d be nuts to invest in the sector at all. On top of that, EI doesn’t even pay a dividend!
However, something has been going on in the business that makes the stock attractive to me and which reflects in that juicy rise in the share price we’ve seen. I don’t care whether my total returns from investing come from dividends, capital gains, or both. And with EI, given the attractive-looking valuation and operational momentum, I reckon we could see further rises in the share price over the coming years.
Today’s half-year report reveals further progress with the strategy of monetising assets and paying down debt, which is working with a backdrop of steady trading. Things are going well and underlying profit before tax came in at £59m in the period, up 3.5% compared to the equivalent period the year before. The gain mainly came from lower interest rates because of the way the firm has paid down some of its debt.
Optimising value
Indeed, during the period, EI sold 348 “commercial property assets” raising almost £333m. The directors have been ploughing surplus funds into debt-reduction and net borrowings are down around 19% compared to a year ago.
The strategy involves switching pubs from tied publican partnerships to free-of-tie agreements. Then, when value can be “optimised”, the assets are sold, as we’ve seen recently. The directors expect to convert around 40-50 properties a year “for the foreseeable future” into EI’s Commercial Properties category, which will have the potential for monetisation by disposal in the future.
As well as reducing borrowings, the firm is rewarding investors through its share buy-back programme, which I reckon is helping to drive the share price higher. Today, the directors announced a further £30m commitment to the programme, which takes the total announced since 15 March up to £65m. The purchases should be complete by the end of September.
I think EI’s value-led strategy is interesting and the company is worth deeper research with a view to me picking up a few of the shares.
