FTSE 100 giant Whitbread reveals plans to spin off Costa. Time to buy?

Having now announced its intention to spin off Costa, Paul Summers takes a closer look at Whitbread plc’s (LON:WTB) latest results.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »