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Or why do I write a newsletter, and not run a fund

There were a number of reasons I stopped running a fund and starting writing a newsletter. The first reason was that the relationship between equities, currencies and bonds were not acting in the way that they used to, or in a way that made sense to me. But also equally importantly was that I enjoyed spending time with my family. These days I spend two weekends a month on the road with my oldest son. Here is a map of places I have DRIVEN to this year.

London to Glasgow is a good 7 hours drive with stops, while Sunderland is 5 hours. Fortunately Jarrett is doing well this year and is second in the Honda Cadet British Championship.

If you want to be kept up-to-date on karting, then follow Jarrett on instragram @jarrettclark55 or Tik Tok @jarrett.clark55

So karting does take up a lot of my time. And has led me to a possible stock idea. The interesting thing about this stock idea is that it leads right back to the reason I stepped back from managing money. Lets take a look, and I can explain as we go along.

Most kart tracks are located in out of the way places - mainly due to noise pollution. The hotel chain we stay at the most is Premier Inn. Premier Inn is the main operating asset of UK listed Whitbread (WTB LN). Whitbread used to also own the Costa Coffee brand before selling it to Coke Cola. Whitbread has been around a long time.

One Sunday morning as I was eating my all you can eat English Breakfast (cost £10) before we headed off to the track, I noticed another karting dad getting his breakfast for free after waving his “Shareholder Benefits” card. If you own 64 shares of Whitbread (at todays price of £26.76 would mean an investment of £1712), you are entitled to a free breakfast with every stay, and 10% of food and drink at their restaurants which are attached to the Premier Inn. So on average month of 5 nights at the Premier Inn I could save £1000 a year, making this a no-brainer investment, with a 1.7 year return on investment!! Of course, this risk is that the benefits could be cut and that Premier Inn could fall by half or more - which seems to happen regularly with UK mid cap stocks (see Ted Baker, Genus, Aston Martin etc etc) so I took a closer look at Premier Inn.

Premier Inn is a low cost hotel chain that aims to be located near transports hubs, such as motorways, railway stations and the centre of small towns. They also own a number of pub brands, including Beefeater, Brewer’s Fayre, Thyme Bar & Grill among others. The pub are used as a restaurant for the hotel, particularly for breakfast, but are run as stand alone businesses. In the Premier Inns I have frequented they do very well in attracting locals. I can attest to the £17 chicken and rib combo as being decent.

Premier Inn has 840 sites and 82,000 rooms, making it the largest hotel brand in the UK. It competes with brands such as Travelodge and Holiday Inn. As a rule I prefer Premier Inn over both Travelodge and Holiday Inn as its has better rooms and tends to be cheaper. Premier Inn books directly rather than through online travel agents, which is a big positive. As far as growth is concerned, Premier Inn is targeting 110,000 rooms in the UK. It has recently entered Germany, and has a target of 14,000 rooms, and see potentially expanding to 60,000 rooms. So there is growth potential. If we assume EBITDA margins return to 40%, and revenue per room returns to pre-Covid levels, and they hit their growth numbers (110,000 rooms in the UK and 14,000 in Germany) then they should generate GBP1.4bn of EBITDA. 10 time EV/EBITBA has been roughly the level it has traded at before, and in line with Accor, gives an EV valuation of GBP 14bn. Less 5bn in debt, give an equity valuation of GBP10bn, compared to a market cap of GBP 5bn.

One thing I like about Premier Inn is that its low end, and not concentrated in London, which means if my theory of falling income equality is realised it could do quite well. It would also imply upside to revenue forecasts.

One big problem for Premier Inn, is that most of it hotel and pubs need to be driven to. And as someone who drives a lot, the current price of petrol in the UK is a problem.

While the spike in oil is linked to the Russian invasion of Ukraine, it has been exacerbated by the Bank of England being very unresponsive to rising inflation. Which has cause sterling to be weak, leading to more inflation.

So the big risk is that the Bank of England raise rates dramatically, or sterling continues to weaken, and inflation continues to erode incomes in the UK. These inflation worries have seen Whitbread bond yields move from 2.5% to 5% today, and the stock suffer accordingly.

Whitbread sums up the dilemma with all investing today. If inflation is here to stay, then financial assets are still too expensive. And if cost of living crisis continues, corporates are likely to see margins squeezed, and rising yields putting pressure on valuations. On the flip side, Whitbread is a well run company, and has a history of selling assets, so could easily be bought out. The stock is cheap if its can hit its growth targets.

What am I going to do? I think Whitbread looks better than 90% of stocks out there. But even so, my base view of still rising inflation and rising commodities makes me very cautious. As I have at least 2 more years of karting ahead of me - so I think I will buy my 64 shares and get a free breakfast! I guess that’s one way to hedge against food inflation. For everyone else, you need to take a view on inflation and bond yields, and my view is that they have more to go, but if I am wrong on that, then Whitbread looks a decent play to me.

Sports related observations, particularly with finance connections
Russell Clark