Looking ahead to Spirit’s FY results, which are due on 16 October, Jamie Rollo at Morgan Stanley focus on the group’s plans for its underperforming leased pub estate, and looks for any comments on managed performance in 2013 as the like-for-like sales boost from the capex programme is likely to slow as this normalises. He said: “LfL sales have already been reported at +4.8% for the year across the group’s managed estate, with a general slowdown during the period. We think this partly reflects the slowdown in the capex programme, which has been boosting LfL sales, and now 85% of pubs have been fully refurbished. While Spirit says it continues to outperform the market on invested LfL sales, we will be looking for an uninvested LfL sales figure, which we think is more indicative of the underlying performance. For the FY, we expect a 10bps EBIT margin increase to 14.4% in Managed, a sharp slowdown from the 70bps increase in 2011. "However, after the 30bps drop in H1, this implies a strong 60bps increase in H2. For 2013, we look for guidance on cost inflation, the number of refurbishments, the benefits of H2’s central cost reductions, the benefit of lower pre-opening costs as capex falls, any further provision changes, and any benefits from the new EPOS system that is being rolled out.” “LfL net income across its leased pubs has already been reported at -5.4% for the year, with H2’s -6.7% worse than H1’s -4.9%. However, Q4 was sequentially better than Q3, and the company said that as it has nearly finished most five-year rent reviews, it has taken the majority of the pain, albeit some will still flow into H1 2013. We look for more detailed KPIs at the results, an update on progress on its alternative operating models, and the outcome of the detailed site by site review. “The slow pace and high costs of the proposed managed conversions suggest this programme could be wound down further, and if confirmed we think that the company could sell more Leased pubs than its expectation of 100. For 2013, we look for guidance on when the rent rebasing normalises, costs of any new operating models, potential to shrink overhead further as the estate shrinks, conversions to Managed, and likely disposals. “Our Underweight on Spirit’s shares reflects four factors. First, FCF is low due to high capex levels, high debt levels, and some loss-making leased pubs, and the PLC cash is being drained without a chunky upstreamed dividend from the securitised debt vehicle in which all the profitable pubs reside. Second, while the Managed pubs offer catch-up potential to M&B trading levels, average unit sales and margins have always been lower than MAB for structural reasons, and the impressive sales growth rates will likely fall now the investment programme winds down. Third, the Leased pubs (c 40% of EBIT) are trading very poorly, and while we think Spirit’s plans to sell many of these makes sense, it will be heavily dilutive, we forecast. Finally, the valuation looks up with events, on 9.8x 2012e P/E and 8.8x EBITDA, rising to 11.6x and 9.7x respectively adjusting for the operating lease provision, which boosts accounting profits by c.15%.”