Take profits at Costa owner Whitbread, recommends Panmure Gordon

LONDON (ShareCast) - Costa coffee and Premier Inn owner Whitbread (LSE: WTB.L - news) was out of favour among investors on Thursday, with Panmure Gordon downgrading its rating on the stock from 'hold' to 'sell'. The risks are now too high to justify the shares trading on record-high multiples and at a significant premium to the market, the broker said.

Panmure said that rising debt levels and falling returns at the leisure company now mean that the shares are "no longer a safe haven".

"We believe now is the time to take profits and downgrade our recommendation to 'sell'," said analyst Anna Barnfather.

They admitted that the company has done well alongside the UK consumer recovery with the boom in coffee consumption and its roll-out plans.

However, the analyst said: "We see cracks appearing with a steep step-up in competition and rising development costs across all three businesses [Costa, hotels and restaurants].

"Furthermore, there is limited visibility on overseas profitability with on-going challenges to international expansion." The broker said that capital expenditure is "rising dramatically" and will exceed cash generation over the next few years. In turn, net debt will rise and returns will fall.

Panmure maintained a 4,250p target price for the stock, implying around 20% downside to Wednesday's closing price of 5,305p. By 10:34 on Thursday, the shares were down 2.5% at 5,175p.