Jamie Rollo at Morgan Stanley looks to ahead to the full year results from Enterprise Inns, which are due on 19 November. He says: “2013 has been a fairly disappointing year for trading, but Q4 trading started well and we hope for continued positive momentum as comps were weak in August, as well as in H1 14 with the snow and Waverly collapse last year.”
“We expect the focus at the FY results to be on Q4 LfLs, current trading, updated disposal guidance following the convertible bond issue, as well as informal LfL guidance for 2014.We forecast revenue of £643m (-7%), EBITDA of £310m (-9%) and EPS of 17.9p (-12%), all slightly below consensus. We expect the focus to be on LfLs in Q4 where the company was guiding to modest growth, current trading, and updated guidance on disposal plans following the convertible bond issue.
“2013 has been a fairly disappointing year for trading, but Q4 trading started well and we hope for continued positive momentum as comps were weak in August, as well as in H1 14 with the snow and Waverly collapse last year.
“We currently forecast 2014 LfL net income to be flat, and will look for informal guidance from the company, particularly given the one-off issues affecting 2013. We recently reiterated our Overweight rating and increased our price target following an upbeat meeting, our growing confidence it can return to sustainable positive LfL growth, and our greater focus on property value, where its c. 50% discount to book looks unjustified.
“Trading should have improved in Q4. 2013 has been a disappointing year for Enterprise, with net income deteriorating to -3.6% in the first 44 weeks of the financial year, after a period of sequential improvement (from -4.3% in 2011 to -1.2% in 2012), and it seems to have underperformed its Leased peers after outperforming in 2012 (see chart below).
“Trading did improve sequentially throughout 2013, however, from LfL net income -4.4% in the first 17 weeks, to -4.2% at the H1 stage to -3.6% at the 44 week stage, and we were encouraged that the first 5 weeks of Q4 saw modest LfL growth. Management were upbeat on Q4 trading at our recent meeting, noting the warm July-August weather and easy Olympics-affected comps.
“Enterprise needs flat LfL net income in Q4 to hit our FY forecast of -3%, implying flat in the last 8 weeks of the year, and with the company targeting LfL growth in Q4, we think our FY forecast is well underpinned.
“The company does not usually comment on current trading at this stage, but we will look out for any update given it knows the impact of the collapse of wholesaler Waverley TBS (£2m from profit), which took place in October 2012, as well as the poor weather last year. Since the Q3 results, we have seen solid trading statements from most pub operators, although we are concerned that LfLs are still in the red at Spirit Leased.
“At the Q3 stage, Enterprise had disposed of (or had in the hands of solicitors) 356 pubs, delivering proceeds of £127m, with Q3 proceeds per pub slightly up on H1 at £374k (vs. £335k in H1). We estimate that disposal proceeds for the year will be £200m, in line with guidance.
“We expect management to give updated guidance on disposal plans following the issue of the £100m convertible bond, which allows it to reduce bank debt without having to continue its currently unusually high level of pub disposals. In 2013, the pubs sold were a mix of low value pubs (<£300k) and some prize assets (>£1m) and we expect this to change in 2014, with the convertible bond meaning it should only need to dispose of its underperforming tail-end pubs. We currently estimate £75m disposals proceeds in 2014 and £55m p.a. after that, and will look for more details on guidance here.”
“At Q3, Enterprise said that net bank borrowings had fallen to £217m, and we forecast this will have dropped to £40-50m by year-end, helped by the £97m net bond proceeds. The company has prepaid some Unique securitised debt to ensure it can continue to upstream cash while it still needs to, meaning the bank debt covenant is much safer.
“We think this means the risk of a serious credit event has basically disappeared. While group net debt is down from its 2007 peak of £3.8bn to an estimated £2.6bn at the end of 2013, net debt:EBITDA has remained stubbornly high at 8.1-8.2x, as LfLs have been under pressure and pubs have been sold. However, with LfLs hopefully stabilising and FCF strong, we expect this multiple to start to come down.
“Looking into 2014, trading will be impacted by a number of moving parts. H1 was impacted by snow and poor weather (c. £1.5m from profit), as well as the collapse of Waverley (£2m), which should flatter H1 2014. H2 2014 faces tougher comps from the warm weather, although will receive a small boost from the shift of Easter back into the half. Overall, we forecast flat LfL net income, and will look for informal guidance from the company at the results.”
