* Recommendation changes
While remaining bulls of the LT growth strategy, we move InterContinental Hotels Group from Buy to Neutral, PO to 2200p (22x 2015E PE, in line with US peers) from 2100p (ADR PO to US$36.08 from US$33.50); based largely on valuation (post a 16% P/E re-rating in 2013) and subdued ST earnings momentum; we are 5% below 2014 consensus EBIT. We cut Edenred from Neutral to Underperform, PO to EUR22 (20x 2015E PE, 10% discount to VISA/Mastercard average) from EUR24.3 as the earnings downgrade cycle continues, reflecting EM currency weakness (c.50% EBIT); we are 7% below 2014 consensus EBIT.
* Sector valuation trading close to highs
Over the past two years sector SPs have doubled; valuations have re-rated 65% to 16x vs. historical 10-18x range. Inevitably, growth/upgrades now need to take a more prominent role in driving SP upside. Our key picks stay focused on earnings momentum, structural growth and where there is still potential for valuation upside.
* Idea 1: Whitbread (Buy, PO raised from 3700p to 4500p)
We are 7% ahead of consensus 2014/15 EPS and continue to back the LFL (3-4%) and space growth (7%+) strategy. We also continue to like the strategic optionality in relation to either the disposal of Pub Restaurants (worth £700mn+) and/or the separation of Costa Coffee (worth £2.5bn+). Our new 4500p PO values Premier Inn 12x EV/EBITDA, Pub restaurants 9x EV/EBITDA (in line with industry peers) and Costa Coffee 13.5x EV/EBITDA (in line with Starbucks). In aggregate this values Whitbread at 20x 2015 EPS; a growth rating for a growth stock.
* Idea 2: Compass (Buy, PO raised from 1070p to 1160p)
Compass is capable of a prolonged 15% TSR. The global food service market is large (US$200bn) and only 44% outsourced; the biggest players are taking share. The BS remains prudent (1x net debt to EBITDA) with capacity for greater utilisation. Cyclical volumes are depressed (c.12% vs. 2008) which has potential to recover. Margins will continue to improve (we forecast 8% by 2018). Our PO 1160p (2015E PE 21x) values underlying business 1000p (2015E PE 18x) with an additional 100p for future BS utilisation and 60p for cyclical volume recovery.
* Idea 3: TUI Travel (Buy, PO raised from 450p to 485p)
TT is on the front foot strategically with content and distribution led strategy that is resonating with consumers. It is driving better margin, earlier bookings, improved visibility and lower risk. Trading momentum is positive as shown by another year of >10% CC EBIT growth in 2013. By 2017, we forecast unique product mix to be 75%+, direct distribution to be 80%+ and group margin to be c.5%. Further, BS is in good shape with close to £1bn of cash by 2015. Our PO 485p (2015E PE 14x) values mainstream 9x EV/EBIT and non-mainstream 12.5x EV/EBIT.