Hedge funds parking the tanks on Whitbread PLC's (LON:WTB) lawn has perked up the Costa Coffee owner's share price to fair value, HSBC argues.
The bank has downgraded the stock to 'hold' after the recent rally, though the price target has been held at 4,800p.
READ: Whitbread surges as activist investor Elliott Advisors emerges as largest shareholder
Whitbread shares currently trade at 4,171p, down 29p on the day.
HSBC believes that Costa Coffee and Whitbread's hotel chain, Premier Inn, are both past their peak and face competitive and macro pressures.
“Up to 2015, Costa enjoyed supernormal returns as it benefited from its first-mover advantage and limited competitive pressures.The market has since caught on to the growth in coffee consumption and competition is hitting the company from all directions: from direct peers with Starbucks and Nero upping their game on roll-out, refit, range and technology; from budget operators (Greggs, JDW, MCDs) improving coffee quality; and finally from premium peers rolling out in dense areas,” said HSBC.
Sale numbers remain weak, margins falling
Despite some investment in technology and food, Costa's like-for-like sales numbers remain weak and margins have been falling as cost savings cannot offset staff/commodity inflation and investment needs.
As for Premier Inn, the chain is viewed by HSBC as a good asset but is at the mercy of London and macro trends.
“With an uncertain UK macro outlook, persistent weakness in London and aggressive roll-out from its closest peer, Travelodge, we think it is also past its peak market positioning,” HSBC opined.
Recent market revenue per available room (RevPAR) trends have been subdued, growing at less than 1% year-on-year for midscale operators between December and February, with London in decline.
As for the break-up for which activist hedge funds are petitioning, comments in the press suggested around £3bn could be added by a break-up of the group but HSBC believes there is now only roughly £1bn of potential unrealised value in Premier Inn.