Leading sector analyst Douglas Jack at Peel Hunt says he expects the Ei Group to have posted its 15th consecutive quarter of positive LFL net income in Q3, but forecasts a decline in Q4 (Jul-Sep).

He said: “In our view, forecasts should be held with: managed expansion in line; MRO take-up limited; a bounce back in pub sector trading in October; and encouraging growth in Christmas bookings.

“Pub partnership’s LFL net income grew by 1.6% in H1 vs a 2.0% comp with tenant financial health measures remaining strong. Tenants are benefiting from c57% of capex being growth-orientated versus 10% in 2009. Unplanned business failures affected 1.5% (annualised) of the estate in H1 versus 7.3% in 2009. The LFL comp was 1.7% in Q3 (beatable), and 2.7% in Q4 (difficult).

“EIG has further improved licensee support. Its arrangement with Booker Wholesale has helped 4,000 publicans boost their food offering (on good buying terms, but only if they have stayed tied). Online, it has launched a new recruitment tool and added new regionally-focused pages as well as an applicant dashboard.

“The managed estate’s expansion should be on target, with approximately 50 Bermondsey, 35 Managed Investments and 170 Craft Union sites at year end (30 September). Commercial lease expansion (at 350 sites) should be behind, pleasingly due to fewer MRO conversions.

“Expect an update on the MRO’s impact. In September 2016, only 20% of EIG’s estate was vulnerable to the MRO, and we estimate this ratio is falling by 2% pa due to disposals, conversions and the company not awarding long leases. As at 3 August, there were just eight MROs with a further 60 MRO claims with the adjudicator, materially below our original forecast of 80 MRO conversions by 30 Sept 2017 (and 260 by 30 Sept 2020).

“Our forecasts are in line with consensus, yet our estimate of 2.6% growth in average tenanted pub profitability assumes minimal growth in LFL net income after tail-end disposals (in H1, the average disposal multiple was 11x EBITDA).

“Patron paid 9.5x EV/EBITDA for Punch Taverns, and then sold Punch A to Heineken for 9.8x. Given that EIG has historically traded at an average 1x EBITDA premium to Punch, reflecting higher average asset and securitisation quality, we view the Punch deal as supportive of EIG’s current 9.6x EV/EBITDA valuation multiple.

“In 2018E, we forecast EBITDA falling by 0.6%, outpaced by net debt falling by 5.0%, creating 17% growth in equity value. Although the company’s priority is to repay the £100m 2018 corporate bond (6.5% coupon), we estimate it could also buy back £25m worth of shares in 2018E. Given this, recent weakness and a reduced political/regulatory barrier to the company’s growth, we are upgrading our recommendation to Buy.”