Leading analysts Mark Brumby at Langton Capital, Geof Collyer at Deutsche Bank and Douglas Jack at Numis, take a look at this morning’s update from Enterprise Inns.

Brumby said: “Enterprise is trading in line with expectations but, with the MRO option currently making its way through the House of Lords before being returned to the Commons, some observers will have their eyes elsewhere.

“And that’s a pity. Furthermore, the group’s reining back on capital spending on leases with longer to run and, though that is completely understandable in the circumstances, is arguably not the optimum solution for the industry, Enterprise itself, the fabric of its estate or its tenants and lessees over the longer term. So unintended consequences may well result. We have outlined our thoughts on the MRO elsewhere, please drop us a line if you would like further details.

“Re trading, Enterprise echoes the comments of other operators. Christmas was good but the rest of December and January have been slower. The group should earn around 18.7p in the current year putting its shares on an undemanding 5.8x EPS. The MRO option has injected a note of uncertainty into proceedings but the results there, by definition at this stage are unknown.

“We are not entirely pessimistic with regards to the outcome and believe that there is some upside risk developing in the share prices of ETI and other impacted pub companies.”

Jack: “LFL net income rose 0.3% over the 18 weeks to 31 January. We are holding our forecasts. In our view, politicians are now unlikely to soften the Market Rent Only option. Thus, meaningful equity upside requires a clear plan to deal with this threat, and that plan should have consequences that the politicians had not intended.

“LFL net income rose 0.3% in Q1, with trading slightly weaker in January, in line with much of the sector. The underlying trend remains positive, supported by growing sales in the wet-led pub sector: beer and cider sales rose by 1.2% in value terms in the year to December 2014, according to CGA Peach.

“Growth in LFL net income also reflects self-help, and estate improvements in particular, with growth capex rising to 41% from 32% as a proportion of total capex last year. Combined with increased business support, this helped the number of business failures to fall by 16% last year, with further reductions occurring over the last 18 weeks.

“This progress is being put at risk by the Market Rent Only option (MRO), which is likely to result in a material decline in support and capex, resulting in 4,600-6,400 pub market closures, according to the Government’s own figures.

“Options available to Enterprise are: legal challenge; further managed conversions (14 have been done); possible franchise-type agreements (whereby the pub is effectively managed, with the licensee on a turnover-based salary); and ceasing all major capex (c.100k) that requires a return in excess of five years. The most exciting response for shareholders would be the creation of a separate investment and support-free REIT for all existing (c.165 to date) and likely future free-of-tie leases.

“We are holding our full year 2015E forecasts, which are in line with consensus and assume LFL net income rises 0.5% and net debt falls 4%, versus a 2% decline in EBITDA (due to 200 pub disposals), enabling net debt/EBITDA to fall to 7.8x from 8.0x. We still prefer Punch Taverns based on valuation (8.6x vs 9.7x EV/EBITDA) and gearing (7.4x vs 7.8x net debt/EBITDA).”

Collyer said: “After the H1 results and the UK election (both in May), we expect ETI to host a CMD at which we envisage the group laying out its detailed response to the MRO impact. We see this as driving a much more dynamic, overtly commercial property management approach to delivering shareholder value, which could also include carving out a REIT, a managed estate and a more directly controllable tenanted estate.

“This should re-engage investors with the equity and significantly narrow the current discount to NAV (65%). Our 205p price target is based on a 30% discount, but is also 10x FY’15E P/E – the average for ETI since IPO in November.”