Peel Hunt’s Douglas Jack and Ivor Jones give their view on Ei Group’s future, ahead of its interim results announcement next week.
They predict slightly positive like-for-like growth in the tenanted and leased estate and strong managed like-for-like sales, largely offsetting lost EBOTDA from a slowing disposal programme. They stress that debt reduction is the main attraction of Ei Group, whose challenge is to keep growing drink margins, the principal driver of like-for-like net income since 2012.
Their note says: “Pub Partnerships’ LFL net income grew by 0.5% in Q1 vs a 1.6% comp. This slight slowdown was due to December’s snow and slightly softer trading conditions in January; also against a 1.6% comp, trading conditions were even tougher in Q2 due to even colder weather in February and March. This could challenge the company’s run of positive LFL net income, which has extended to 18 consecutive quarters.
“The recent trend has been stable LFL rent and growing product sales, driven by price and better buying terms. We believe MRO negotiations are holding back rental growth, whereas product growth is benefiting from positive premium drink trends, and tied licensees extending their buying range, taking advantage of EIG’s bulk purchasing power, which has benefited from managed estate growth.
“In the managed estate, LFL sales grew by 6.8% in Q1 (outpacing the pubs constituent of the Coffer Peach Business Tracker: +1.4%) aided by the estate being wet-led and freshly invested. Sector trends are also supportive: the wet-led pubs sector overtook food-led pubs in relation to growth in drink sales per outlet in calendar Q4 2017, and this trend continued in calendar Q1 2018.
“In the commercial leased estate, LFL net income was up 4.6% in Q1.
“Despite the unhelpful Q2 weather, we expect to hold our 2018E forecast, which assumes 0.5% LFL net income growth and 2.6% average profit growth in Pub Partnerships after tail-end disposals (in 2017, 224 pubs were sold: we forecast 175 in 2018E). They also assume 1.9% growth in managed LFL sales. Comps will toughen in Q3 (which should benefit from the World Cup) and soften in Q4.
“In 2018E, we forecast EBITDA falling by 0.7%, outpaced by net debt falling by 4.1% despite £20m of forecast share buybacks, creating almost 20% annual growth in equity value. The shares trade at a material discount to the 280p/share NAV; we believe a de-merger of the commercial leased estate into a REIT in 2020/21 should help to close the gap. “