Analysts have welcomed Enterprise’s announcement as “sensible, inevitable and well-planned” and said a similar move must now be expected from Punch Taverns.
Mark Brumby, of Langton Capital, said: “Enterprise is cautioning that comps are tougher Q3 but says that it hopes to remain in positive territory for the year as a whole.
“Forecasts are not under review & the majority of attention today will be focussed on the strategy review.
“Here the group is adopting a flexible approach that will see it move from a Head Office based company with a few hundred staff to a multi-layered operator with many thousands.
“This is a sensible response both to increase flexibility and, latterly, to deal with the implication of the MRO – but it is not without execution risk.
“For example, forecasts and projections may have been made on a micro level when, in fact, the group’s competition will react.
“Other operators will not want to lose staff. Salaries may rise and competitive offers, particularly across smaller managed units may become more common.
“Nonetheless, today’s strategy review, which has been over a year in the formation, seems sensible, inevitable and well-planned. We would expect to hear something broadly similar from Punch in due course.
“In terms of valuation, the group should earn around 18.7p in the current year putting its shares on a still-undemanding 7.1x EPS with a little growth to come in FY16.”
Geof Collyer, of Deutsche Bank, said: ”ETI has detailed its response to recent changes in legislation that could have had a deleterious impact on its profit streams. Instead of downgrades, we would expect progressive upgrades to forecasts and valuations over the coming years as the group achieves far greater control over its profit streams, which will also become more varied. The timing may not suit everyone, as the plan extends out to FY’20, but the progressive move from directly controlling less than 5% of the EBITA to almost 50% within 5 years should have a profound impact on the valuation.
”Our analysis of the review would suggest that our earlier view (see “Sum-of-the-Pubs” 13 April 2015) was reasonably accurate in terms of how ETI would restructure its business. However, ETI is planning a more assertive business mix than we had, with almost double the planned number of managed pubs vs. our estimates. This should narrow the discount to NAV from ~55% today to <10% by FY’20E – potential upside of about 180%. BUY.
”Moving towards a sum-of-the-parts valuation By FY’20, we estimate that ~25% of EBITA could be coming from a Managed estate (3 different formats), ~25% from the Commercial property estate (with REIT conversion potential), and the remainder from a much higher quality Tenanted & Leased estate – each part with different valuation parameters. H1’15 results & forecasts EBITA -1.7% at £144m was 2% below DBE, due mainly to higher central costs. However PBT (+3.6% at £57m) and EPS (+4.7% at 9p) produced the second consecutive half of growth, following H2 last year, after 15 halves of decline. Lfl net income was +0.6%, the 7th quarter in a row of recovery. We have trimmed our forecasts by ~2% due to higher central cost investment for retail, but have retained our 215p (fully diluted) price target.”
