Whitbread succumbs to investor pressure and unveils plans to split out Costa

What do the changes at Whitbread mean for investors?

Article updated: 25 April 2018 2:30pm Author: Helal Miah

  • Group says Costa will be segregated from business within 24 months and demerger viewed to enhance longer term value.
  • News overshadowed full year results which were disappointing as Costa fell short of expectations.
  • The Share Centre recommends Whitbread as a ‘hold’ for medium risk investors.

With activist investors recently taking on large positions in Whitbread it seems the management have finally acted upon their feedback as it has announced this morning that Costa coffee will be segregated from the rest of the business within the next 24 months.

Over the course of the year there have been calls for Whitbread to be broken up as its two businesses don’t have too much overlap. The company have clearly taken on-board the views that a demerger of the group would enhance value over the longer term. Both Costa and Premier Inn have grown over the years to a strength and scale which will enable them to thrive as standalone businesses. Indeed, both are leaders in their own fields in the UK and independence will aid international expansion plans. For Premier Inn this will allow them to focus in Germany where it has recently made acquisitions and for Costa to focus on the vast opportunities in China.

This news has been welcomed by the market as the shares rallied up by a few percentage points at the open. However, the demerger has overshadowed the full year results that were also published this morning. Group revenues were higher by 6.1% to £3,295m while group underlying operating profits rose by 5% to £622m. The market can be a little disappointed with these results, the Premier Inn business performed in-line with expectations but Costa fell short of expectations both on a revenue and earnings basis. Nonetheless, both businesses demonstrated impressive growth figures as Premier Inn’s number of rooms in the UK rose by 6.4% to 72,466 rooms and the acquisition in Germany takes the number of rooms there to over 5,000 while the number of Costa Coffee stores in the UK increased by 9.2% to 2,422 and the number of stores in China grew by 9.8% to 449 stores. The full year dividend was lifted to 101 pence per share.

Focus for interested investors will now be on what this means for shareholder value going forward with almost everyone in agreement that there will be an uplift. The demerger will take place through a separate stock listing of Costa which some analysts view could value the business as high £3bn. The separation should allow each business to focus on its own specialist areas and expand internationally to become less reliant on Brexit impacted UK markets for which the management expect to remain highly challenging for the foreseeable future.

Over the last few years the shares have struggled to break out of a sideways trading pattern and are some way off highs experienced in 2015 as the group has failed to match the stellar growth rates of the past amid rising macro-economic pressures on consumer incomes and labour costs. While there is some hope that there are better prospects going forward, we still maintain our relatively neutral ‘hold’ recommendation in the stock for investors seeking a balanced return and willing to accept a medium level of risk.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment.