Whitbread to hold on to pub freeholds

Whitbread wants to retain ownership of its freehold pub property, company bosses have told Morgan Stanley analysts at a meeting this week.

In a note, Morgan Stanley's leisure analysts concluded retaining freehold ownership made sense because of current investments which would, for the moment, depress profits.

Morgan Stanley added: "However, both these sound like timing issues, and assuming Mitchells & Butlers (M&B) can construct its proposed joint venture (with Robert Tchenguiz) successfully, we think this must be a path which Whitbread considers. After all, it would retain control of its properties, and Travelodge and M&B show that this business can continue to grow without retaining direct ownership of the real estate."

The majority of Whitbread's 400 pub restaurants, where food accounts for 60% of the division sales, the highest of any listed pub division, are being re-imaged by 2009.

It is spending between £300,000 and 400,000 per pub, and experiencing 25% volume growth (sales of £200,000 to 300,000) converting at a 40% margin (£75,000 to 100,000 profit uplift).

The Beefeater refurbishment is complete, and those pubs in their second year of conversion are still seeing some growth. Morgan Stanley noted that "it is early days for Brewers Fayre, and the third time in recent history the company has attempted a major overhaul, but so far signs are encouraging with 25% growth". A note from Morgan Stanley said: "Whitbread sees further scope for cost reductions via tighter control and better management.

"It is now enforcing wage bands, reducing layers of management and supervisors, implementing tighter cash handling, and is working on reducing product wastage.

"Whitbread was upbeat about the prospects for smoking ban, unsurprisingly given it plays into the hands of pub restaurants. Its Scottish pubs experienced no impact on sales from the ban, as higher food sales offset drink and machine declines, and it is "well-positioned" ahead of the English ban."

Morgan Stanley estimated Whitbread should generate a 20% return on investment on its £150 million refurbishment spend, a profit uplift of around £30 million, or £80,000 per pub.

It added: "This would take its profits from last year's £48 million base (£52 million reported less £8 million contribution from pubs sold to MAB, plus £4 million incremental cost savings) to £78 million, more or less our current forecast in 2010. ​

"But further operational and central cost improvements could feasibly take this to £100 million, our bull case.

"This would equate to £250,000 sales per pub, and margins of 19%, both in-line with M&B's pub restaurants division."