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Thu 14th Jul 2016 - Starbucks makes investment in Princi, Fulham Shore results
Starbucks makes investment in Princi: Starbucks has become global licensee and investor in the Italian restaurant Princi, the boutique bakery and cafe founded by Rocco Princi in 1986. Known for its artisan breads created from traditional family recipes, Princi has five locations in Milan and London. The number of standalone Princi locations worldwide will be expanded and Princi will become the exclusive food purveyor at the new Starbucks Reserve Roastery and Tasting Rooms in Shanghai and New York. Announced earlier this year, these immersive coffee experiences bring to life Starbucks line of premium, small lot Reserve coffees in a retail space which allows the roasting, brewing and craft of coffee to take center stage. The Shanghai and New York Roastery locations are on track to open in 2017 and 2018, respectively. “We have never baked in our stores in 45 years. But all of that will change with the creation of this unique partnership,” said Howard Schultz, chairman and chief executive of Starbucks. “Rocco and his team at Princi possess a passion for handcrafted food and artisanal baked goods that mirrors how I feel about our coffee. The attention to detail, the care invested in selecting the ingredients and the artistry of preparation is second only to the service Rocco offers customers inside his Princi stores. I can think of no better pairing for our most premium coffee experience and am excited by the possibilities we envision in Princi food elevating every daypart – breakfast, lunch, and dinner – in Starbucks Roasteries and Reserve Stores.” Considered by many as the finest example of a modern eatery, every detail is considered in a Princi store – from the minimalist aesthetic designed by architect Claudio Silvestrin to the uniforms created by a renowned Italian designer. In addition, Princi locations are well-known for their 24 hours of operation, offering customers everything from light breakfast to impressive dinners from an “always-on” beechwood fired oven. “As a young man, I dreamed of the opportunity to bring traditional Italian baking to customers in my country but when I opened our location in London, I realised how much we could also offer an international clientele,” said Rocco Princi, founder, Princi Restaurant. “I have long admired Starbucks, the values Howard has imbedded into his organisation and we are honored to be a part of bringing to life an entirely new retail environment with the Roasteries.” In addition to the expansion of standalone Princi specialty stores and inclusion of fresh baking in Starbucks Roasteries, the company will also partner with Rocco Princi to bring a premium food experience to its new Reserve only stores starting in 2017. Since the acquisition of La Boulange in 2012, Starbucks reinvented its food portfolio at more than 14,000 stores in the US and Canada, and will continue to bring customers authentic French homemade specialties, delivering true culinary artistry on a grand scale. Currently, Starbucks has nearly 24,000 stores worldwide and offers Reserve coffee in nearly 2,000 locations in 30 countries.

Fulham Shore reports sales near £30m: Fulham Shore, incorporated in March 2012 to take advantage of ‘attractive investment opportunities within the restaurant and food service sectors in the UK’, has reported sales for the 12 months ended 27 March 2016 of £29,251,000 (nine months ended 29 March 2015: £8,310,000). Headline Ebitda for the 12 months ended 27 March 2016 was £5,232,000 (nine months ended 29 March 2015: £1,297,000). Headline Operating Profit for the 12 months ended 27 March 2016 was £3,280,000 (nine months ended 29 March 2015: £790,000). Operating Profit for the 12 months ended 27 March 2016 was £507,000 (nine months ended 29 March 2015: £25,000) after incurring £405,000 of costs in relation to the acquisition of Franco Manca Holdings Limited (nine months ended 29 March 2015: £374,000 of costs in relation to the reverse acquisition of Kefi Limited). Net debt as at 27 March 2016 was £3,283,000 (29 March 2015: net cash of £3,029,000). The company opened seven new Franco Manca pizzeria, one new The Real Greek and one Bukowski Grill franchise during the year ended 27 March 2016 (nine months ended 29 March 2015: One The Real Greek). Since the year end it has opened a further 5 Franco Manca restaurants and introduced an online takeaway ordering platform for Franco Manca. Fulham Shore currently operates 34 restaurants: Nine The Real Greek; 24 Franco Manca; and one Bukowski Grill. David Page, chairman, said: “Sites are available, our restaurants are busy and popular, our prices are good value and our staff are well motivated. We therefore look forward to the further expansion of our Franco Manca and The Real Greek businesses during the current year.”

Jamie Rollo – Whitbread has significant hidden value: Morgan Stanley leisure analyst Jamie Rollo has argued that Whitbread has significant hidden value, which could be unlocked by separating its property assets. He stated: “Could (or should) Whitbread follow Accor and Hilton (and join IHG and Marriott) who have both announced plans to become asset-light? Separating real estate could crystallise significant value (£55+ share price), but would also bring with it complexities and risk, and there are simpler alternatives. Hotel companies are accelerating their move to an ‘asset-light’ model, and splitting the ‘bricks’ (real estate) from the ‘brains’ (hotel brands / operations). AccorHotels recently announced it would separate and sell the majority of its real estate subsidiary HotelInvest. Hilton Worldwide announced plans earlier this year to spin off its real estate and timeshare businesses. IHG last year completed its transformation to an asset-light model with its final large owned hotel disposal. This will leave all three generating 85-95% of their income from fees paid by third-party asset owners and, along with Marriott which led the way over two decades ago, five of the six largest global hoteliers will have an asset light model. Falling bond yields are increasing the attractiveness of hotel assets as an investment vehicle, and separating out the real estate allows this component to be separately valued. Managing and franchising hotels generates a more stable, higher margin and capex-light revenue stream relative to owning or leasing hotels, and these companies generally trade on higher valuations than integrated operators such as Whitbread. This leaves Whitbread as the only large cap European hotel operator that is ‘asset-heavy’ and owns the majority of its hotels. Premier Inn owns nearly two-thirds of its hotels and leases the remainder. It is unusual not only relative to the other large hoteliers above in having close to zero income from managing and franchising hotels, but also relative to other European economy/budget hotel chains, which tend to have a much smaller owned mix. This is partly a function of history, as Whitbread’s legacy pub assets and brewing business provided the land and cash flow respectively to fund much of the hotels’ expansion. But this asset heavy model has continued, with around half the pipeline being owned assets, the property portfolio growing each year, and Whitbread spending c.£700m per year in capex, which is nearly all of its Ebitda. Whitbread says it prefers this model, that it can generate significant value without resorting to large disposals, and does not need to free up capital for M&A. We agree that owning is superior to leasing given it provides security of tenure, is higher margin (and therefore less volatile), generates development gains given a new hotel is generally worth more than its construction cost (and can provide future gains from extensions), and it tends to be a cheaper form of funding than leasing. But hotel investors tend to value integrated hotel companies like Whitbread as operators rather than as real estate owners, so Whitbread’s property backing is not fully reflected in its valuation, we think. We see considerable upside if Whitbread were to convert to a truly asset-light model. Converting to a pure managed or franchised business would require Premier Inn to separate not just its real estate but also its leased hotels, and to structure a management contract on these. One way to do this could be to create an internal subsidiary and then sell some or all of this business to third party owners, like Accor plans to do with its HotelInvest division. ‘WhitbreadInvest’, let us call it, would then pay Premier Inn (or ‘WhitbreadServices’ let us call it) to use the brand and manage the hotels on its behalf. We estimate such a propco could be worth £6.0bn, based on the implied multiples using HotelInvest’s €6.9bn valuation, with another £1.4bn for the high quality asset light hotelier. A £7.4bn valuation would be 13.3x cal 2017 Ebitda, and well above our current valuation, and if we add in Pubs and Costa this gets to £55 per share, 50% above the current share price. Note that this structure would not be the same as a full sale and leaseback as WhitbreadInvest would hold both the leases and the real estate, and WhitbreadServices would be a high quality asset light hotelier with no lease commitments. However, such a restructuring is only theoretical given Whitbread’s stated preference for owning or leasing its hotels, and it would bring with it complications. For example, how to treat Pubs (which are adjacent to the hotels so share land)? How to structure an arms-length contract given both businesses would be wholly dependent on the other? How to value WhitbreadInvest, and what discount would be needed to sell so much UK real estate at once? And finally, given Premier Inn would effectively be separating 80% of its Ebitda and value, it would leave a very small business in terms of EV. This is because fees from operating third party real estate are a fraction of income from owning or leasing that real estate. This point about scale is one reason why the other asset light hoteliers are c. 10x larger than Premier Inn by room count, operate globally, and have a range of brands. But Whitbread could still become more ‘asset-right’. We have argued in the past that the company has too much real estate, and that this ‘hidden’ value is not recognised in its valuation. We do not think selling all the real estate would help, as it would leave a highly leveraged opco, with continuing capex needs: not an appropriate structure for a cyclical industry in an uncertain economy. One alternative could be a sale and leaseback of some of the real estate, enough to matter, but not enough to impact its valuation or concern its stakeholders. We estimate Whitbread owns c. £5bn of real estate today and show that a £2bn disposal at a 5.0% yield would imply an £8.2bn valuation for Hotels & Restaurants and £57 per share for the stock. A 5.0% yield would be well above the sub-4.0% rate the company achieved on its recent £84m London sale and leaseback (note this was signed post the Brexit vote). As UK bond yields fall further, the maths of selling real estate get more attractive. Another alternative could be the rolling sale and leaseback programme, where the company could part-fund its heavy capex programme with selling hotels that it has built where there is a hidden capital gain on development. Whitbread aims to sell £100-150m in assets this year, so we expect more to come. Either way, and without even going into the potential for a Costa separation, we see several options for Whitbread to crystallise value and support its share price. Whilst its current programme of sale and leasebacks may be small, the analysis above and the potential for ongoing sale and leasebacks both demonstrate the significant hidden value within the company.”

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