HSBC downgrades 'past its peak' Whitbread

HSBC analysts have downgraded Whitbread to ‘hold’, arguing the company’s businesses are past their peak and have lost trading momentum.

The 10% rally in Whitbread’s shares since 13 April has removed the company’s deep discount and made the balance of risk and reward for investors more sensible, the analysts said. They reduced their rating to ‘hold’ from 'buy' and maintained their £48 price target, leaving room for a further 14% gain.

Whitbread’s shares rose after Elliott Advisers emerged on 16 April as a holder of more than 5% of the shares, mainly through derivatives. The activist investor reportedly wants Whitbread to break itself up by demerging Costa, its coffee shop business, from Premier Inn, its budget hotel chain.

The HSBC analysts cast doubt on reports that a break-up could unlock £3bn of value for investors. There is only about £1bn of unrealised value in Premier Inn, they said in a note to clients on Wednesday.

After years of booming business, Costa faces fierce competition from direct rivals such as Starbucks and Caffe Nero, budget chains including Greggs and premium cafes in cities. Trading is weak and there are not enough cost savings in the business to cover investment and higher staff and commodity costs, the analysts said.

Premier Inn, Whitbread’s biggest business, is a good asset but relies on a London market that is cooling and bulging with stiff competition, they added.

“With an uncertain UK macro outlook, persistent weakness in London and aggressive roll-out from its closest peer, Travelodge, we think [Premier Inn] is also past its peak market positioning,” the analysts wrote. "We believe that the fundamentals of [Whitbread's] business have weakened and the trading momentum is negative."