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Gabriele D’Agosta on WhitBread: Buy the Stock Get 2nd Largest Coffee Chain Free

Gabriele D’Agosta has been a Vice President of Morgan Stanley since 2001. He worked for Goldman Sachs and Lazard in London in the Private Wealth Management division. He graduated in Business and Finance at Bocconi University, Milan. Gabriele is a CFA charterholder since 2003.

Whitbread – play on UK consumer

Evolved from brewer to restaurants/fitness centers to now, hotels & coffee

Below is a brief history of the company:

Founded by Samuel Whitbread in 1742

Whitbread created the first purpose – built mass – production brewery in UK, introducing brands such as Stella Artois and Heineken.

In 1948, Whitbread was listed at London Stock Exchange.

In 1987, First Travel Inn opened, originally brand name for Premier Inn.

In 1995, Whitbread acquired Costa Coffee.

In 2001, Whitbread sold its breweries and pubs.

In 2004, Whitbread acquired Premier Lodge.

In 2008, the hotel business was rebranded Premier Inn.

Brief Overview:

Headquartered in UK

Over 40,000 employees worldwide

More than 11 million customers every month in the UK alone

Main Businesses:

Hotels & restaurants

Coffee shops

2.8 billion euro market cap, 1.6 billion revenue; 12.3 P/E

More than 44,000 rooms and nearly 400 restaurants

Whitbread holds about 90% of its hotels and restaurants and wants to remain predominantly freehold.

It operates in the economy segment of the hotels industry, under Premier Inn.

98% of the business comes from UK.

Premier Inn hotels: vertically integrated – in contrast to the now-standard lease/franchised/managed approach, because management believes economy segment doesn’t work if “asset-light.”

Premier Inn is different than most other UK hotel operators. Premier Inn owns, manages and brands the hotel under its name.

Despite the fact that Premier owns 87% of the rooms in its hotels, compared to Starwoods, which only owns 7%, White Bread has a PE of 12.5 and EV/EBITDA of 7.4x, compared to Starwoods’ 32.1x PE and 12.7X EV/EBITDA. Premier Inn owns a far larger percentage of rooms than any other competitor, yet trades at a large discount to all of their competitors. The cheapest competitor, IHG, which owns 1% of their rooms, trades at a PE of 18X!

Costa Coffee: bought in 1995 – second largest coffee chain in the world.

Costa Coffee was founded in 1971 by Italian brothers Sergio and Bruno Costa.

It was a wholesale operation supplying roasted coffee to caterers and specialist Italian coffee shops.

In 1995 it became a subsidiary of Whitbread.

It is the largest coffee shop chain in the United Kingdom and the second in the world (behind Starbucks).

It operates 1,175 stores in the United Kingdom and 442 stores in 28 countries worldwide.

Their biggest branch is in Dubai and can seat 320 people.

Costa has shown to be a good business with good growth potential.

Costa is market leader in UK.

EBIT for the company has increased from ~250 million euros in 2007, to over 305 million euros in 2010.

The company has 36% of the market share in the UK, compared to Starbucks, which only has 23% of the market share.

UK outlets grew from ~350 in 2006 to ~1100 in 2010. Estimates are for UK outlets to grow to ~1300 in 2012, and for international outlets to be at ~700, compared to ~50 international outlets in 2006!

Polls also show that the vast majority of people prefer Costa over all other major brand competitors.

Valuation:

White Bread has has 2.6 billion euros of fixed assets on its balance sheet, a 14% net income margin.

Although, revenues have grown from under 1.2 billion euros in 2006 to 1.6 billion in 2010, net income is still below 2006 levels. However, OCF has increased over the period from 250 million euros to 350 million euros. Capex is very volatile and was ~200 million euros in 2010.

The number of total rooms grew by 47% from 2006 to 2011.

NET DEBT / EBITDA has decreased from 3.5x in 2004 to ~1 in 2010. Clearly, the company is delivering growth while at the same time decreasing debt.

Current valuation:

P/E: 12.5x

P/BV: 2.35x

EV/EBITDA: 7.4x

The company’s stock has decreased 21% since the beginning of 2011.

Real estate value 3.8 billion (derived by adjusting for recent transactions – not reflected on balance sheet), liabilities 0.9 billion (including pension liabilities) = 2.9 billion book value – so Costa and hotel business you are getting for free!

Catalysts

1. Possible move in asset-light direction

2. London 2012 Olympics should drive occupancy

3. Costa is growing – probably worth around 1 billion Euro

Disclosure: None

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.6/5 (8 votes)

Comments

go_loe
Go_loe - 3 years ago
Wow, this is a good company to read into! Thanks!

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