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Barclays Capital asks: What if Whitbread decides to sell Costa Coffee and its real estate?

The broker’s analysts said they estimate that under such a scenario Whitbread’s ‘sum of the parts’ value could be 4,700p in its upside case, and 5,700p in a blue sky scenario
Costa coffee cup
They said: “We see the most ‘obvious’ step, if any, as a sale of Costa rather than an ‘opco propco’ break-up of the hotels”

Analysts at Barclays Capital have raised their target price for Whitbread plc (LON:WTB) after posing the question what if the blue chip leisure giant decides to sell Costa Coffee and its hotels real estate?

In a note to clients, the broker’s analysts said they estimate that under such a scenario, Whitbread’s ‘sum of the parts’ value could be 4,700p in its upside case, and 5,700p in a blue sky scenario.

READ: Strong coffee needed by investors in Whitbread as shares tumble amid worries over costs and slowing UK sales at Costa Coffee

The analysts pointed out that following the arrival of an activist investor – Sachem Head - on Whitbread’s shareholder register in November, they have received numerous requests from investors asking the same questions and trying to understand the potential willingness of the board/key shareholders to engage in such discussions.

The BarCap analysts added that, in recent months, they have sensed a more open approach from Whitbread’s management regarding corporate activity, though they have felt this was more about the options on an 18-month-plus time horizon than anything imminent.

They added: “We see the most ‘obvious’ step, if any, as a sale of Costa rather than an ‘opco propco’ break-up of the hotels”.

Challenging trading conditions

Overall, the analysts said they are not positive enough to upgrade their rating for Whitbread from ‘equal-weight’ to ‘overweight’ due to current trading challenges, as well as the risks of a slowdown in business investment or consumer confidence.

They also added that, on their estimates, they only see around 7%-13% upside potential were the group to just sell Costa.

The analysts said they consider that an opco propco hotel scenario, which implies an additional 14-30% upside potential, as more challenging against the current backdrop and sense less desire from management to embark on this.

They increase their target price for Whitbread shares to 3,920p from 3,800p previously, however, to reflect a higher multiple for Costa given what they see as an increased likelihood of a sale.

January update a negative

The analysts also noted that Whitbread will issue a third quarter trading update on January 18 which they do not expect to be positive given weaker industry RevPAR (revenue per available room) trends for hotels and softer retail footfall data.

They forecast a 1% fall in Q3 RevPAR and a 0.5% decline in like for like sales at Costa, albeit with Whitbread’s restaurants stronger at 1.7% growth.

However, they think that, more encouragingly, Q4 trends have been better, and given that this will be Whitbread management’s first opportunity to comment on the potential separation of the group since Sachem Head’s stake disclosure, any open-minded commentary in this regard combined with reassurance on current hotel trading would, in their view,  likely mitigate any Q3 disappointment.

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