In advance of Ei Group’s full year figures next month, analysts at Berenberg share their views on the pub company, and suggest it may be ‘stock worth dusting off again’.
The note by Berenberg read: “EI Group is the UK’s largest pub company by sites, with c4,500 pubs. Once a GBP4bn company, it faded into obscurity following a dramatic fall in fortune through 2007-2009, when the market cap fell to as low as GBP280m. However, we believe EI Group is a stock worth dusting off again.
“The shares have doubled from lows since management set out its new strategy in 2015 – yet it still trades at a c50% discount to NAV. With potential for a material asset disposal ahead, the rebuild project is still in its infancy. We initiate with a Buy rating and a GBp200 price target.
Investing to improve returns: “Having de-leveraged and stabilised earnings, management now has capacity to invest for growth, which has been neglected in recent years. Annual growth capex has more than doubled since 2013, and EBITDA per pub is back on the rise.
“The majority of incremental capex has been focused on management’s new strategy to invest in c125 sites per year, which are being taken under EI Group’s own management (as opposed to being run by an independent tenant). EI Group now has c360 managed pubs, which have been delivering EBITDA returns on investment over 20%, and achieved lfl growth of 6.6% in the first 47 weeks of FY18.”
Asset sales to crystallise value: “While (for the most part) we believe NAV-driven arguments have little value for the UK pub operators, EI Group’s situation is unique for two reasons. Firstly, with a c50% gap between its market cap and NAV, the valuation gap is too big to ignore. Secondly, there is a realistic prospect of EI Group crystallising value, with the company having recently appointed Rothschild to advise on the sale of its non-core c375-site Commercial Properties portfolio. As discussed in this note, we believe that these assets could be worth at least cGBP300m.”
The future of EI: “In our base-case scenario, EI Group holds EBITDA broadly flat, as investment in its managed sites offsets annual disposals of c150 tenanted sites per year. However, through a combination of disposals and free cash generation, the company should deleverage at a rate of over GBP100m per year, which could drive a material debt to equity shift.
“In the meantime, the asset value should provide a nice backstop, while investors have a free option on any sale of the Commercial Properties division, which we think will only take place if the price is right. Any sale is likely to: 1) rapidly reduce leverage; 2) could help close the gap to NAV; and 3) may well pave the way for special returns to shareholders.”
“The result of EI Group’s investment in its sites has, unsurprisingly, been a material improvement in EBITDA per site, which has helped to offset the impact of disposals on group profitability (as discussed in more detail in key investment point three). We expect that investment to remain a tailwind for the foreseeable future, with management highlighting that it expects to invest in transitioning over 100 pubs per year well beyond the 500 managed site target it has in 2020.”