Jamie Rollo, analyst at Goldman Sachs, looks ahead to the upcoming Q4 update from Spirit Pub Company (22 October). Having already reported a Q4 update, he expects the focus to be on current trading, where M&B’s recent update suggests September was disappointingly weak.
He said: “We forecast revenues of £764m (+1%), EBITDA of £149m (+2%), EBIT of £114m (+5%), PBT of £55m (+8%), and EPS of 6.4p (+10%), in line with consensus PBT of £55m and EPS of 6.4p. Our forecasts imply PBT growth of 11% in H2, compared to 3% in H1, reflecting H2’s weaker comparatives, better weather, and the cost savings from the completion of its new systems rollout. Spirit has already reported Q4 trading and we do not expect any surprises at these results.
“LfL sales have already been reported at +1.6% for the year, with an improvement in the last 12 weeks to +4.1%. This was below our +6% Q4 estimate and we had expected better given the warm weather and weak comps from poor weather and the Olympics hit last year, although Spirit said it continued to outperform the market. For the FY, we expect a 130bps EBIT margin increase to 12.2% in Managed, after a 150bps expansion in H1 (around 50bps of which was from lower depreciation reflecting the write-down of pub assets at year-end) aided by central cost reductions.
“We will be interested in current trading given M&B said September had been weak across the board as consumers reined in spending after a summer splurge. For 2014, we will look for guidance on cost inflation, the number of refurbishments, and any further benefits we can expect from the new EPOS system that has now been fully rolled out.
“LfL net income has already been reported at –2.1% for the year, with a sequential improvement to -0.4% in Q4 following -4.4% in Q3 and -2.9% in H2. Spirit had previously guided to stability by year end, so this looked a touch disappointing given it had lapped the rent reviews and the period should have been boosted by the warm weather, and we will look for more detailed KPIs here. Spirit completed 45 Leased investment schemes and 14 disposals in the period, further narrowing the tail, and we will look for an update on progress here, as well as with its alternative operating models.
“For 2014, we look for guidance on like-for-like expectations given rent rebasing has now normalised, and we are encouraged that Punch Taverns is expecting 1% LfL sales growth in 2014 and 1-2% growth in 2015 in its core estate, after 5 years of declines. We will also look for guidance costs of investment schemes, alternative operating models, and likely disposals.
“We forecast a final dividend of 1.36p (+5%, same as the interim), giving 2.05p for the year, a yield of 2.8%. We continue to believe that the dividend is too high as the c. £15m upstreamed dividend from the securitisation structure looks too small to fund a c. £13-14m annual ordinary dividend, £10m onerous lease costs, £10m PLC capex, and the £1m pension cost, meaning PLC cash has been shrinking rapidly.
“PLC cash dropped from £77m at year end to £62m at the end of H1, despite a £7.5m upstream from the debenture post year end, and we expect this to fall to £53m at year end, and to c. £30m by August 2014. We forecast reported net debt of £956m, or 6.4x 2013e EBITDA.
“For2014, we forecast LfL sales in Managed of +3% and 60bps EBIT margin expansion, and flat LfL net income in Leased, giving EBIT of £119m (+4%), PBT of £61m (+1%) and EPS of 7.0p (+10%), broadly in line with consensus at PBT of £59m and 7.0p. Trading comparables are easy in the first three quarters due to the poor weather in F2013 and we will look to the current trading statement and outlook commentary for guidance here. Mitchells & Butlers reported a weak start to September. Every 1% on LfL sales is c. £4m to EBIT, we estimate.”
