Wednesday tips round-up: Whitbread, Alliance Trust

29th Apr 2015 20:05

A new branch of Whitbread's Costa coffee chain returns half the investment necessary to open it in just its first year. In terms of numbers that translate into a 46% return on capital. Little wonder then the company wants to increase sales from £1.4bn to £2.5bn by 2020. The other largest unit at the company, Premier Inn, also has hefty expansion plans in mind Its aim is to lift the number of rooms from a tad under 60,000 to 85,000 over the same time frame. The restaurants business also does its bit of supporting Premier Inn although at 3% the rate of revenue growth last year was more pedestrian.Trading at close to record highs and at 23 times earnings the stock price would seem to be reflecting too much optimism on the outlook. If one believes the international side will put in a better performance that could explain the valuation. However, given there is a green chief executive in place the shares look expensive. A little profit-taking may be justified. "Take profits," says The Times's Tempus.Embattled Alliance Trust chief Katherine Garrett-Cox managed to forestall further agitation from US activist investors Elliot Advisors until the 2016 annual meeting. In exchange, it accepted the nomination of two out of the three non-executive directors recommended by Elliot. That suggests fear, not compromise. To take note of, it appears that too few shareholders supported chief executive Garrett-Cox's efforts to fight off the invaders. Tied together with the fact that underlying performance issues remain unresolved that means there is but an uneasy alliance.The main problem at Alliance Trust is that its fee structure is a poor fit for a fund which is very correlated to its benchmark. The effect which the siege will have on the tank and file also needs to be considered, especially when one of the main aims of Elliot is to allow external management of investments in a bid to improve performance. In any case, the walls have been breached by the invaders which may explain why the company's discount to its net asset value has been reduced by a few percentage points to 11%, writes the FT's Lex column.