Derek Pain: 'Whitbread's doubters should wake up and smell the coffee'

Should Whitbread spin off its highly successful Costa Coffee operation? Many in the City believe such a move is only a matter of time, but I am becoming increasingly convinced that the group's combination of budget hotels, pubs/restaurants and coffee shops will remain in place.

The latest round of stock market chatter follows last week's impressive interim figures, the swansong of chief executive Andy Harrison. He is due to depart early in December, replaced by the banker Alison Brittain.

There is a feeling she is receptive to launching Costa as a standalone company. However any change in Whitbread's boardroom seems to galvanise the frothy "Costa will go" brigade. The indications I have received are that Whitbread is reluctant to undertake any break-up.

Mr Harrison is leaving on a high. When he arrived five years ago, the shares were around 1,200p. They have since hit 5,500p, but following this summer's stock market slump, they are, as I write, 4,940p. A few weeks ago the price was 4,550p, given a nudge down by some analysts who feel the group's debt is too high and that competitive pressures, plus the Government's new minimum wage, will burden Whitbread.

Although the foreshadowed pay structure will increase its wage bill, it could reduce the impact by instituting higher prices and cutting costs.

Certainly, the results should calm the doubters. Half-year underlying pre-tax profits rose 13.8 per cent to £291.3m and, after exceptional charges, came out at £254.9m against £241.8m last time. The dividend is up 13.1 per cent to 28.5p a share.

The Premier budget hotels lifted turnover by 12.6 per cent and Costa by 16.2 per cent. The pubs/restaurants turned in a reasonable performance.

The group is continuing its rapid Costa and Premier expansion, both in this country and overseas. Profits of around £540m, compared with £463.8m, are in sight for this year. Despite their summertime fall, the No Pain, no Gain portfolio intends to stick with the shares. After all, some stockbrokers are looking for a price exceeding 6,000p.

I somehow doubt if the group will be caught in the flood of profit warnings that seems to be afflicting the stock market. According to the accountancy firm EY, 79 companies posted red flags in the third quarter of this year, a jump of 40 per cent on the previous three months.

True, there are signs that Britain's recovery may be slowing, but the increase in profit alerts is largely down to the collapse of commodity prices, the Chinese slowdown and patchier global growth. The internet age may also be a factor as more companies struggle to adapt to the digital economy; hacking and glitches have become common occurrences.

Lloyds Banking Group, another portfolio constituent, has not featured in the array of warnings either. So the No Pain, No gain portfolio, whose house rules demand that only £5,000 should be invested in each company, will be unable to take part in the Government's promised share sale, which should occur next year. The float will finally end the state's involvement, which stems from the financial crisis. The promised offer has been dressed up to appeal to small investors, who will get favourable treatment.

I believe, Lloyds, although its performance has so far been rather subdued, will prove a highly profitable investment in the next few years.