Growing talk of possible Greek default unnerves investorsIt was a grim end to the week as fears of a Greek exit from the eurozone grew stronger, with the country and its partners seemingly as far apart as ever despite the promise of yet more talks.Investors were already unnerved by Thursday’s news that the International Monetary Fund - one of the beleaguered country’s creditors - had left the negotiating table. But market falls accelerated following reports that EU officials had discussed the prospects of a Greek default on Thursday for the first time.Whitbread’s market leading positions via Premier Inn and Costa Coffee in fragmented but growing UK markets leaves it well placed to achieve its new 2020 milestones of 85,000 UK hotel rooms and £2.5bn of Costa system sales. Indeed, we believe both divisions could grow strongly for at least a decade before investors need to worry about hitting market saturation. This should be more than enough time for Whitbread to build out its international bridgeheads into significant growth drivers. We are upgrading our recommendation to buy from hold and hiking our target price to 6000p [from 4300p], implying 20% potential upside.The stock has risen 30% in the year to date (relative to a 10% increase in the FTSE 350 general retail index), and no longer offers compelling value given that we estimate it is generating a free cash flow yield of 4.8% for adjusted EBITDA compound annual growth rate of 6% over the next 3 years, with some margin pressure likely from dollar appreciation. For income investors this might be a solid holding given the relative comfort of the return of the free cash flow to shareholders, with the company announcing that it will return cash later this year (with the quantum to be announced at the interim results), but we find better value elsewhere on a total shareholder return basis. In the mid-cap UK retail space, for example, we prefer B&M and Pets at Home. Continue reading...
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