"20 years ago over 50% of Whitbread revenues came from brewing and pubs. Today, pubs are off the menu (bar those supporting the hotel estate), while brewing is long gone. In their place are more than 2,300 UK coffee shops, and a 70,000 room hotel estate. Quite the transformation.
Costa revenues grew from Â£143m in 2005 to Â£1.1bn in 2015, compound annual growth of 23% a year, while Premier Inn checked in growth of 12%. However, while more recent performances remains respectable, there's been a notable slowdown in growth.
There are several short-term reasons for that, ranging from weakness in the London hotel market to lower city centre footfall hitting Costa's high street shops. New products, including self-service coffee machines and the stripped down 'hub' city centre hotels, may go some way to alleviate those pressures.
With less than 10% market share in key segments such as London hotels, there's still room for both brands to grow domestically in some areas. However, on the whole Whitbread is running out of new places to pitch up. That has inevitable consequences for the pace of future growth.
Major cost headwinds in the UK business are adding to the pain, and even the group's impressive cost control has failed to keep margins heading in the right direction.
Overseas expansion seems a reasonable response. So far Premier Inn's international expansion has focussed on Germany. Costa is further down the international road, and already turns a small profit. Especially positive noises are coming out of China.
We see no reason why both couldn't sell as well internationally as they do at home, but building international brands from scratch takes time. In the immediate future the challenge will be guiding a more mature UK business through less favourable economic conditions
Whitbread shares trade on a prospective yield of 2.8% and a price to earnings ratio of 14.3 times (a slight discount to its ten year average). "
It maybe though, that there is something in this and the cycle is indeed on the turn.
Personally I'm 50:50 on the viewpoint, as demographic shifts in age are still with us, but I have to admit to have been moving gradually away from some of the indebted (share buy back artists) companies of late.
The coffee issue wasn't India or China, but in the Middle East, now resolved without brand damage.
India has 60 outlets all Franchise
China has 425 outlets (so not so small beer at all) - 9 of which are Franchise.
As HB points out, the growth potential is pretty big, assuming they can make them all profitable of course.
"... Costa has been in India since 2005.... It seems pretty well established as a master Franchise..."
Great detective work, Sherlock! Difficult to find any mention of it from WTB itself... anything at all, to an almost suspicious degree. In any event, it can't be making any returns of any note, given that Costa's overall international profits are small enough at the moment - and that includes places where they ARE happy to admit to!
"Typically the franchise agreements are set such that you source all of your marketing, products and formats from the principle for a number of reasons... "
Yep, but it could be uneconomic and impractical to supply them with Costa's own coffee, if they don't produce it locally... If it got big enough for them as a market I would imagine that could change, but I am guessing that overseas efforts are mostly focused on China now. I would guess that they (WTB/Costa parent) would have some quality control and oversight on coffee sourcing, to make sure they're not just boiling up a big heap of Red Mountain...
The key question for your sources is, what do Starbucks do in China (eg. with coffee supply) and are Costa doing anything materially different? Given they are clearly setting out their stall to replicate what Starbucks have achieved over there.
But all in all, not seeing anything here - at this stage - to move the needle at all on overall stock appraisal or valuation...
It seems pretty well established as a master Franchise -- I think there might be a dispute but I'm not clear on any facts.
Typically the franchise agreements are set such that you source all of your marketing, products and formats from the principle for a number of reasons, the principle one might be to maintain a certain standard of product and image with the customer and also typically to maximise the returns to the company.
"Rumour has it that these units are not buying their coffee via Costa according to franchise agreements -- doesn't surprise me but not great for international returns I suspect... No facts here, just hearsay and speculation - but coming from a close source."
News to me, Games - partly as I didn't know they had ANY coffee units in India, or indeed franchise units in China (I thought they now had full control in South China, and an ongoing j.v. partner in North China). But I am prepared to be enlightened...
Maybe it is cheaper for the Chinese units to buy their coffee from elsewhere, and thus accretive to returns? Maybe Costa doesn't actually produce and supply coffee to these retail markets at all, they way they typically do in the UK? If they don't, maybe it's something they plan to introduce over time, as and when they buyild their presence?
"I wonder if Crozier is on board to do a deal quickly and offload Costa?"
I doubt it... I suspect they would much rather hold onto it for at least the next 2-3 years. And Crozier (who is non-exec, lest we forget) isn't really a dealmaker, more of a transformation / turnaround sort of guy, at least by his past CV - he didn't even manage to sell my ITV for me in the seven years he ran that!
But never say never, I suppose... maybe they'll get an offer they can't refuse?!
Rumour has it that these units are not buying their coffee via Costa according to franchise agreements -- doesn't surprise me but not great for international returns I suspect.
I wonder if Crozier is on board to do a deal quickly and offload Costa?
I'm guessing this isn't as simple or as smooth as the coffee, given that the funding for the coffee expansion comes from the parent company, how might that change I wonder?
No facts here, just hearsay and speculation - but coming from a close source.
"What if Whitbread decides to sell Costa and its real estate? We estimate that under such a scenario the sum of the parts value could be £47 in our upside case to £57 in our blue sky scenario.
While ROCE has been declining for Costa, the levels are still very high at c40% (EBIT ROCE) for the UK stores. These units generate strong cashflows and, for certain investors, this could be a key attraction. While Whitbread management is currently embarking on its own turnaround efforts, other buyers may also have perspectives on how performance might be improved (particularly if there could be any shared best practice from other coffee shop brands that may be owned) ...."
As foreshadowed here and all relevant boards... 2018 trading from tomorrow, so time to repeat last year's "virtual portfolio" challenge. Same rules, as per the papers - equal weighted, valid for the whole year with no switching, full owning-up at year end!
Marks & Spencer
I retain a bias toward UK exposure and 'Value' (the two closely related, obviously), with an expectation that the UK domestic outlook will clarify satisfactorily (if not wonderfully) this year. But it's no slam-dunk... and so hedged with a decent slug of overseas earnings and a general focus on "stock specific" stories - with LLOY the only real pure play on 'UK PLC' and associated sentiment. Ultimately, well aware that it's near-impossible to avoid losers as well as winners, I have asked the question - can I see 15% over 2018 (plus divis)? Without necessarily much help from the wider market.
Four stocks stay in from 2017, with CPI, IMB, ITV and SGC still to justify their original inclusion and getting another chance (SGC was a close call). Bonmarche has done its job as "speculative" midcap retail play; VOD still looks fine to me but harder to see sufficient upside in either valuation or financial reporting; CARD and WTB were tougher choices, both still good for the long term IMHO but I see their respective attractions now more finely balanced against likely persisting near-term headwinds.
I will doubtless be elaborating on the case for each of the "new" inclusions in the course of the year. FWIW stocks actively considered but failing to make the cut (as well as CARD and WTB): Braemar and SBRY (from my 2017 Top 10), then Aviva, BT, Debenhams, Gattaca, Merlin, Morrisons, Trinity Mirror.
FYI I own 7 of the 10 stocks, with all of CPI (still!), WPP, GSK under active consideration (probably in that order). I'd be surprised if I didn't buy into at least one in the course of 2018.
Hi Bill, chances we'll ever meet are slim to none, but I owe you a drink if we ever do.
From your 10, I either got involved or was already, in Bonmarche, Vod (already had), Whitbread, Card, Imperial (already in) and Sainsbury(already in). So while I have other holdings the ones that you highlighted and I liked I think I'll be 100% wrong in taking credit for selecting, so big thank you
Bon up 75+% since purchase, now why didn't I put all my eggs in that basket?
I'm also up in AA, which is another highlighted during the year however, I have 2 holdings 1 longer terms the other purchased in recent drop and has a sell set at 180 which wasn't too far off hitting the other day.
So, I for 1 am really looking forward to your 2018 picks and I wish you a profitable 2018.
I'll save you the trouble, ( I understand) past performance is not indicative of future results :D
That's it for 2017, in market hours anyway, so it is time to tot up the final results for my previously published 2017 Top Ten...
Q1 was not bad (in the end)... Q2 better, outperforming decently... Q3 not so much, a bit of a struggle throughout... and now a reasonable (if selective) Santa rally has delivered (belatedly) a decent enough Q4. It all means a positive absolute return for the year (+1.6%), albeit another good quarter for wider markets means I have underperformed the FTSE 100 by nearly 6% (and around 7% vs FTSE All-Share).
But it's not the full story - I went heavy on income plays, with dividends (including a couple of "specials") delivering a further 5.7%, around 50% more than the UK market yield. So I can point to a total portfolio return of 7.3% for the year - still below the 12% or so returned by the main UK indices, but somewhat nearer respectability - and preserving my status as (distinctly) average fund manager... making you some kind of return on your money, but not actually managing to beat, or even meet, an index.
Star performer, after a pleasing (albeit slightly suspicious) late run, was one of my small-cap speculatives, Bonmarche - up 60% for 2017! Then, at the other end of the size scale, comes Vodafone, an 18% return reflecting a year of solid success... just ahead of Card Factory (up nearly 17% after a rollercoaster ride), although CARD just edges out VOD in total return terms (+26% vs +24%). After that, a good Q4 sees Whitbread end the year up 6%, after 'promising' something much worse for most of it.
But that's it for gains, and 4 "winners" out of 10 doesn't really cut it, I concede. Both Sainsbury and Braemar ended near enough where they started (down just under 3%), but thereafter the disappointments pile up like roadkill... Imperial Brands falling 11%, ITV losing 20%, Stagecoach giving up 24% and Capita's year of woe and warnings means it brings up the rear, some 25% down - with some small solace that it's the only one I still don't own for real (but watch this space!)
How to rationalise this performance picture? Well, looking back at my original post, it seems I predicted it up-front a year ago - I quote... "a vague attempt at balance and diversification across the list, though it's probably still a bit too exposed to the UK economy - and hence any further Brexit downturn. Probably inevitable, given my usual bias towards 'value' and aversion to buying into momentum."
The hope was that the Brexit 'deal', and consequent UK economic outlook, would clarify - while there's finally some sign of that now, for most of the year it's remained mired in the mud of uncertainty and ungentlemanly exchange. There is the (related) theme of Value staying out of favour - albeit with 'green shoots' starting to appear just as the snow comes tumbling - and getting ever cheaper over the year as the market found reassurance in "reassuringly expensive" havens of Quality and Momentum.
So what for 2018? "Double-down" on the combo of cheap UK and underappreciated Value, in the expectation (or 'hope'?) that "this time NEXT year, Rodney".... or capitulate and jump on the market bandwagon, trusting the wheels stay on for another 12 months? Anyone following my thoughts for any length of time will know the answer ... but either way, all will be formally revealed in due course with my Top Ten for 2018 - as I always promised, and likewise enourage others to participate.
FWIW my 'real' portfolio fared better in 2017, up c.11.5% (total return c.15%). Nicely outperforming the FTSE 100 (+7.6%) and All-Share (+9.0%) in both price terms and their total returns of c.12-13%, though lagging the Global Market return of 20%. Given I've owned 9 of my Top 10 stocks for most of 2017 and I didn't set out to pick bad stocks, you can deduce much of my performance came from unexpected quarters - a good advert for diversification, of one's own thought processes and investment instincts as much as sectors and stocks!
Whitbread (WTB) is an attractive growth story and Berenberg says the headwinds facing the Costa Coffee and Premier Inn owner should not be of too much concern.
Analyst Stuart Gordon retained his buy recommendation and target price of £49.00 on the stock, which was trading flat at £38.62 at the time of writing.
He said Whitbread was an attractive growth story that is being affected by two significant headwinds weak like-for-like growth at Costa and the uncertainty about Brexit.
While not wishing to trivialise either, we remain convinced that in the case of Costa, the ongoing structural growth is better than the company is being given credit for and that despite the recent attentions of an activist investor it would need a significant offer to make a sale in the interests of shareholders, he said."
Commentary from Numis on the renewed break-up speculation - FWIW the analyst is extremely good on WTB. Edited highlights below:
"In 2013 when JAB acquired DE Master Blenders and Peets coffee it was clear that there could be further consolidation in the fragmented coffee market. At that time Costa had grown EBIT at a 5y CAGR of 25% and was achieving lfl sales growth in the UK of 5%. The difficulty now is that growth has slowed and the potential to achieve such high multiples on a spin-off may have reduced with it. In 1H18 Costas EBIT was flat and we forecast the same for FY18 as a whole. Lfl sales growth has been uneven in recent quarters: in the 3m to Feb 17 lfls fell by -0.8% and in the most recent quarter growth was only 0.1%. Currently Costa's international business makes an EBIT of only c£7m (LTM) and margin of 4.4%, with scope to improve as investments in China mature....
Notwithstanding these caveats, the sum of parts argument still has some credibility in our view. We note that Starbucks trades on a 2018 EV/EBITDA of 14.3x (Bloomerg estimates) and M&A in the sector has been at multiples over 15x. In contrast, WTB as a group trades on a FY19 EBITDA multiple of 8.8x and P/E of 15.0x, well below its cyclical high of 26x. We believe this partly reflects concerns on the UK consumer environment and is a response to a slowdown in EPS growth.
Valuation implications: Note that each 1x EBITDA turn for Costa is £243m of equity value or 133p per share (3.5%). Assuming that hotels/restaurants continue to trade on c.9x but Costa is valued at 14x EBITDA would add £1.2bn to fair value or 670p (17% vs yesterdays opening price of 3710p). The counter-argument is that the fundamental outlook remains weak and the combination of lfl sales growth of 1.7% (NUMe for FY18) and rising cost inflation will limit earnings growth to less than 3% this year."
well the bloomberg article speculates the asset value cannot improve if in one or two years it is clear expansion in e.g. china of the coffe brand is successful... one can imagine that both hotel and coffe brands could see some improvements internationally... bloomberg seems to say the only way is down...one can take the other view. some put some money on this other view this week.
Bloomberg: If Sachem Head is looking for a break up of Whitbread, it has probably left it too late. Both the investor and the company have missed the best moment to extract the maximum value from the company's portfolio, especially Costa.
When Alison Brittain became CEO in December 2015, coffee shops were riding high on the back of a buoyant U.K. consumer. At the time, the unit was valued at as much as 4 billion pounds by analysts.
What's more, if she had sold or demerged Costa two years ago from a position of strength, she would have had a good chance of being able to hold onto at least some of the proceeds to reinvest in the business.
And, with significant M&A activity in the hotels industry, even more value might have been generated from a sale of Premier Inn to an acquisitive global hotel chain looking to fill gaps in their portfolio.
Fast forward two years, and Costa's like-for-like sales growth has slowed significantly. Competition, particularly from Greggs and McDonalds at the lower end of the market, has ratcheted up, not to mention the fact you can't walk into a retailer these days without being offered a free coffee under some loyalty program or promotion.
Meanwhile, with inflation outstripping wage growth, and the prospect of higher interest rates, the consumer is turning cautious.
Today, analysts value Costa at closer to 2.5 billion pounds. And even if Whitbread were to get that money, an activist would be likely to demand the proceeds be returned to shareholders.
Some surgery would still make sense. The company's breakup value could be more than 50 pounds a share, compared with Wednesday's closing price of just under 40 pounds. There could still be an opportunity to release value from Whitbread's portfolio of hotels: Credit Suisse analysts value the property assets at about 5.4 billion pounds.
With a hedge fund likely to join the debate about what the company should look like, Brittain's strategy of continued expansion, with a sprinkling of cost-savings, should at last be given a good stir. I argued 18 months ago that Brittain should cut back her empire, only for her to rule out a breakup. The trouble for shareholders now is that the company's assets are looking not so much hot as tepid.
LONDON (Reuters) - Whitbread (WTB.L) shares jumped more than 7 percent on Wednesday after U.S.-based hedge fund Sachem Head Capital Management declared a 3.4 percent stake in the British hotel and coffee chain operator.
Whitbread, owner of Costa Coffee and Premier Inn, has been the subject of break-up speculation in the past.
Sachem Head has previously taken activist positions at companies, though it is unclear whether it will push for changes at the FTSE-100 leisure giant.
The hedge fund has already met with Whitbread management, according to a person familiar with the matter.
Before Wednesdays jump, Whitbread shares were down nearly 2 percent this year, having risen in part on hopes that Premier Inns domestic hotels would benefit from foreign visitors cashing in on the weak pound. They fell back when those benefits turned out to be smaller than expected.
The company warned in April of a tougher consumer environment, as rising inflation and muted wage growth forced consumers to rein in spending.
The shares closed about 7.5 percent higher at 3,990 pence.
Sachem Head, with about $4 billion (£3 billion) in assets under management, was founded in 2013 by Scott Ferguson, one of a number for former partners at Bill Ackmans Pershing Square Capital Management who have launched their own funds.
The New York-based firm has been popular with investors, both because of its steady run of positive returns and the fact Ferguson, who shies away from being called an activist, largely stays out of the headlines.
Luckily I am aided here by JP Morgan Cazenove whose laser-like focus on the share price can get within 10p:
Thu, 26th October 2017 - 09:20
JP Morgan Cazenove today reaffirms its neutral investment rating on Whitbread PLC (LON:WTB) and raised its price target to 4010p (from 4000p).
Costa coffee shops may be full, but the market has reached saturation point, so there is no further growth. As I have said many times before, here we are dealing with the concept of the 'product life cycle'. Selling coffee is a mature business and is at the beginning of the downward curve. There is no new innovation, so things can only get worse. The only plan they have is to sell 'specialist' coffees at inflated prices, but this isn't new - Starbucks have been doing it for years,
On top of this, Premier Inn is not a new concept and is beginning to get stale; in the past (Costa and Premier Inn) they have what is known as 'cash cows', which means they are at the mature spectrum and generating plenty of cash, but not being developed. What needs to happen is that a percentage of the cash generated by cash cows is used to develop innovative (and therefore 'new') products, but it hasn't happened. Without new management, Whitbread will enter a period of decline, which will accelerate unless something is done.
Sorry, Lupo you did. See your post 24/10/17. Well, actually you didn't, you were quoting somebody else. So somebody else was right, not you! I recommended selling at 3,724p. As they used to say in 'Are you being served' "going down'.
"I can see Whitbread moving to a 10-12 P/E before it's finished, a bit like Next and a bunch of other companies that look susceptible to consumer belt tightening... I'd be a buyer at 2800 -- so I may never be one of course, but that's OK..."
The difference between NXT and WTB, Games, is that NXT overall profits are now in absolute decline, with no immediate sign of this reversing... whereas overall sales and profits are still growing pretty decently for WTB.
And while the market obsesses too much with partial metrics such as LFLs, and any suggestion of slowdown thereof, these are still positive for WTB - albeit slowing from previous levels - while NXT has been posting fairly big negative LFLs for some time, in at least parts of its business.
So 10-12x P/E would be perverse against a market average of, say, 15x, when overall growth rates remain at least in line with the market average... even without any premium accorded for the track record of superior growth in the recent past.
But things can change, of course... which is why I'd "never say never" to you getting your £28 here - just as I won't say that John Kingham will never get his chance to buy ULVR below £23. The market has a (nasty?) habit of giving you exactly these sort of chances, just when you might think they have gone for good...
But I can say that it's unlikely (IMHO) that Kingham will get ULVR below £23... and I can say that (in the nicest possible way) I HOPE you never get to buy WTB!
yellow - it's all about expectations and despite a continued expansion plan, the existing outlets are not growing as fast as those set expectations. The concern is that there may be a curtailment of the expansion if the existing coffee shops and hotels look less profitable and that will flatten out the future EPS growth.
It's all nonesense of course because there are miriad ways to value these companies and each method comes in and out of fashion faster than Guy Fawkes does on November the 5th.
It appears you either believe in the Whitbread story or you don't.
Looking at the general market, everyone worries about a big correction, when in fact most companies are being corrected on a one by one basis as they report results or issue trading statements -- in every case, good or bad, the market seems to want to sell it off and then it recovers a bit more until the next rather nothing announcement.
I can see Whitbread moving to a 10-12 P/E before it's finished, a bit like Next and a bunch of other companies that look susceptible to consumer belt tightening and no doubt eveyone will blame it all on Brexit, when in actual fact it's more realistically happening because everything has been pumped up.
I'd be a buyer at 2800 -- so I may never be one of course, but that's OK.
"Last year the artisan bakery and coffee outlet next door shut down "
A lot of these places are personal dreams. When the reality of paying wages and rent kicks in its not always so easy. Marketing a small company is really hard when you are competing against corporations. Some will work but many will struggle. The fact is that national advertising campaigns are effective.
Just to add my tuppence worth to the debate ... small town where I live opened a Costa 3 yrs ago. Never seen the town so busy as locals (especially the young) flocked to check it out. It always seems packed when I walk past. Last year the artisan bakery and coffee outlet next door shut down and Costa bought the space and doubled it's footprint with a quick refurb and re-opening for the original shop.
I wouldn't be surprised if this is happening all over the UK and the "more bespoke (quirky) and quaint coffee houses" are losing out big time. I often invest in what I see with my eyes and it's served me well through the years. Also, if the youth like it, which is what I am seeing, then they have a market for many more years to come - as long as they don't screw up of course.
Truck deliveries to the Lambeth roastery were made to Newport street where a forklift would come out into the street with a couple of guys holding lollipop signs to halt the traffic. Once the forklift had grabbed a pallet and darted into the railway arch the traffic was allowed past. Imagine that for a FTSE 100 company receiving its primary consumable in 2017.
This was happening until they moved to the new roastery in March this year.
Apparently green coffee beans arrive at Tilbury, 14 miles from the new roastery. The company says there are training facilities in Basildon to train 3,000 Baristas each year.
Costa may well be poised to up their game, improve service, productivity and hopefully profitability too.
Interestingly, I note that Finland consumes the most per person. Now anyone who follows my admittedly entertaining, foresightful and informative posts will know, the missus is from Finland. When she first came to this wonderful (still) country that we're so fortunate to be nationals of, she'd have coffee first thing in the morning. I weaned her off the stuff, so now she has tea first thing.
The other side of the saucer is that I now have coffee first thing....:/
Not the most useful post I admit, but I'm waiting for the gal from Funland to bring me my mid-morning coffee. I usually do the honours.
"It's very difficult to pick a typical town. They vary so much. As do coffee shops."
Thanks all - I think we have successfully put into perspective any narrow parochial focus on individual personal experience. It all suggests plenty of life in the Costa story yet... if coffee is already in decline, as NB portends, it is reflected neither in anecdotal evidence nor in the numbers. Just as the numbers don't bear out NB's charge of failing to invest in Costa... when he condemns lack of spend and others caveat high ongoing capex, someone must be wrong!
Now, if only we had people on the ground in China to feed back how the Costa story is going down there... but this much we do know, the Chinese are about as far away from "peak coffee" as we are from "peak disdain of politicians" (that's quite a long way, for the avoidance of doubt). And with the UK running only at 45th in the 'coffee per capita' stakes, I don't see it here either, not quite yet.
"Oh dear - what does that say about me? I've never had a Costa Breakfast; but frequently when I'm out & about I have a 'Spoons breakfast."
Rest easy, Hardboy... I've never had a Costa one either, but I did hugely enjoy a Spoons experience earlier in the year... formidable fry-up for a fiver, plus a well-received pint (exceptional circumstances you understand, not my normal routine - okay!) And I am neither that old nor anywhere approaching "down market", in all objective reality...
But as TomHB says, they are serving two different markets.... I know plenty of people (mostly younger) who are confirmed Costa converts but wouldn't be seen dead in front of a 'Spoons breakfast (as, I believe, quite a few people actually are...)
We generally go to Spoons for breakfast when we are off for a day's walking. I can recommend the ones at Liverpool Street and Victoria and Eastborne. My son was in hospital in Leeds a couple of years ago and visiting hours weren't until the afternoon, so we sat in Spoons at the station and watched. The first group of people who came in were chaps who clearly liked to start the day with a beer, followed by a band of Leeds United supporters getting beer and a fry up before setting off for a hard afternoon on the terraces. Then came some serious breakfasters and finally about 10.30 pensioners started arriving for coffee and cakes. We had to leave before the lunchtime crowd arrived. Spoons clearly know what they are doing.....
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