Jamie Rollo at Morgan Stanley looks ahead to the Q3 Interim Management Statement (IMS) due from Enterprise Inns on 9 August and says that with the bank debt now refinanced, focus will switch back to trading and the disposal process, where he expects mixed news.
He said: “With the prepayment of around half of Unique’s scheduled 2014 fixed rate note amortisation and the successful refinancing of the bank facility both complete, the focus will be on trading and disposal proceeds. Comps are a little tougher this quarter, and the weather has been poor (wettest April and June on record), though the company stated that H2 trading had started well, and that it should see some boost from events such as the Diamond Jubilee and Euro 2012.
“For the full year we expect revenue of £705m (-1%), EBITDA of £341m (-7%), and EPS of 19.9p (-15%), leaving us a touch below consensus of 20.8p. While the imminent threat from tripping debt covenants has receded, group leverage remains very high (8x net debt /EBITDA) and the leased pubco model remains challenged, so we remain Equal-weight the shares.
“Enterprise started the financial year fairly well, with LfL net income in the substantive estate +1.5% in H1, suggesting an acceleration to +2.6% in the final 8 weeks.
“Average net income per pub was +3.2%, while LfL trading in the total estate was -1.6%. This suggests that the company will need to see flat trading in H2 in order to hit our full year LfL total estate estimate of -0.7%. We think our expectations remain broadly reasonable though find it hard to gauge current trading.
“On the one hand the weather has been poor, ETI’s comps are a bit tougher (-0.8% substantive LfL net income vs -2.0% in H1
11), and there have been some cautious comments from Leased peers (Punch Taverns LfL core net income -6.4% 12 weeks to 26 May, Spirit Leased -8.0% over the same period).
“On the other hand, summer events may have been helpful (Euro 2012, Diamond Jubilee), and ETI made encouraging comments about a solid start to H2. On balance we see modest downside risks to our growth estimates.
“At the first half, the company had disposed of 114 pubs for £65m, with 17 sale and leasebacks at an average rental yield of 6.85% for around £24m. This is £89m of total proceeds, and it expected to deliver around £200m in the year (MSe £175m) followed by £150m in 2013 (MSe £150m).
“We would expect to see at least another £60-70m in disposal proceeds at the IMS for the company to be well placed to hit our full year expectations, as this would leave some £15m or so in disposal proceeds for the final eight weeks of the year. The disposals market appears to be healthy, with industry reports of Enterprise selling pubs for a multiple of 12-14x earnings, and Christie + Co reporting that demand was keeping apace with market levels of disposals.
“At the H1 results the company had bought back £39m of A4 notes and £2m of A3 notes within the Unique securitisation, and it expected to buy back another £33m of fixed rate notes by September 2013, making it a good year ahead of the debt service coverage ratio calculation.
“The prepayment of these fixed rate notes essentially secures the dividend payment from Unique, and this helped the company subsequently announce a new forward start bank facility. The facility is for £220m from December 2013, lasting until 2016, by which time we expect it to have been paid off. The financing remains expensive at 500bps over LIBOR, while the net debt / EBITDA covenant still includes the Unique dividend, which may shrink over this period.
“We continue to expect the bank debt to have fallen to around £300m at the time of the full year results, down from £397m at March 2012 and £446mm at September 2011, suggesting a figure of £330-340m in August. The next main debt challenge will be to start buying back and then refinancing the £600m corporate bond due in 2018.”
