Leading analyst Anna Barnfather, of Panmure Gordon, gives her views on the prospects for Young’s, including her admiration for its strong portfolio but concerns over London trading post-Brexit:
“We believe that Young’s will continue to benefit from strong trading driven by ongoing investment and focus on premium, quality offer. The company’s portfolio includes some of the best locations in London and the South East and its balance sheet remains the strongest in the sector with a largely freehold estate and a net debt to EBITDA ratio of just 2.5x.
“The ramp up of new pubs and additional cost savings means our forecasts are well underpinned and protected from wage inflation. Additionally, the Young’s premium offer affords them greater flexibility in mitigating inflationary pressures. We reiterate our Buy and target price of 1400p.
Strategy and trading update
Young’s remains a high quality, mainly freeholds pub operator focused on London and the South East, have exited brewing in 2011. The majority of pubs are managed with growth via a combination of acquisitions, organic expansion and robust LFL growth (historic LFL of >5% over the last three years). The recent update shows LFL sales running at 4.1% and total sales 6.5%, not helped by the wet weather in June but showing strong and resilient trading nevertheless. While we have concerns about London trading post Brexit, the company has not seen any measureable impact and remains committed to its strategy of on-going investment with capex running at c12% sales. Recent management changes (CEO/CFO) are natural evolution and do not, in our opinion, signal any change in strategy.
Operating leverage and inflation
Young’s has an annual wage bill approaching £77m, equivalent to 31.2% of revenue – towards the top end of its peer group reflecting his service levels and London weighted wage costs. However, its focus on the premium end of the market, combined with operational excellence, means that its EBIT margin of 16.7% is ahead of its peers, providing greater flexibility (pricing power and cost efficiencies) in mitigating wage inflation.
Balance sheet and financial gearing
Young’s retains one of the strongest balance sheets in the sector with net debt to EBITDA ratio of just 2.1x, and 2.7x when adjusted for leases. This in underpinned by a portfolio of freehold property, predominantly in London, valued at £665.8m. With low financial gearing, and strong asset backing, we believe there is scope for further small, selective acquisitions.
Young’s trades on a 2017E PE of 19.5x and an EV/EBITDA ratio of 11.1x – this is a premium to the Pub & Restaurant sector average of ratio of 9.3x, however we believe this is justified reflecting its strong asset backing, low leverage (net debt/EBITDA 2.2x) and robust trading (average LFL >5.% over last three years).