Leading analysts, Douglas Jack and Ivor Jones, have given their views on Fuller’s, which gives its Q3 update on 25 January, saying they expect 2018 to be a year of consolidation for the group.
They said: In H1, LFL trading was positive in all divisions (albeit with Q1 stronger than Q2, largely due to weather), and we expect a further positive result in Q3. After all, managed LFL sales were up 4% during the first seven weeks of H2. We expect to hold our forecasts and would use recent share price weakness as an attractive long-term buying opportunity.
Managed LFL sales rose by 3.6% in H1 (split 6.6% in Q1, 16 weeks; -1.2% in Q2, 10 weeks), and were up 3.7% after 33 weeks. Accommodation LFL sales were up 8.2% in H1; accommodation is just under 10% of sales. The volatility of trade reflected the high weather sensitivity of pubs in south-east England during the spring-summer months. The recovery in trading in October-November showed that the softer trading in July-September was not all consumer-related.
Over the last three years, Fuller’s LFL sales have averaged 5.0%, versus a 2.3% average for the London pubs constituent of the Coffer Peach Business Tracker (CPBT). We believe this reflects: a strong culture for differentiated, premium product and service; and the company investing in its venues and staff. In the six weeks to 7 January, London pub LFL sales (per CPBT) were up 1.5% vs 0.6% nationally.
Being London-orientated, Fuller’s managed estate is more wet-led than those of its quoted managed peers. This positioning, as well as its orientation to the growing premium segment, should have benefited LFL sales. In the six weeks to 7 January, managed pub LFL drink sales (per CPBT) were up 1.8% whereas LFL food sales were -1.4%.
Managed margins fell by 20bps in H1. Fuller’s needs 4% growth in LFL sales to maintain managed margins, which is higher than the peers due to Fuller’s higher London-orientation (for example, having to absorb a 26% increase in business rates). Over the full year, we forecast LFL sales rising by 3% and margins falling by 30bps.
Tenanted LFL profits rose by 3% in H1 (split 5% in Q1; flat in Q2) and slowed to being up 2% after 33 weeks. Brewing beer and cider volumes rose by 1% in H1 (split 5% in Q1; -5% in Q2) and were up 1% after 33 weeks.
Fuller’s opened one managed pubs in H1 and sold 11 tenanted pubs. There is a pipeline of four managed pubs: two conversions from tenancy in H2; and two openings in transport hubs thereafter (The Signal Box at Euston station and The Parcel Office at Liverpool Street station).
We continue to expect 2018E to be a year of consolidation, due to one less week (52 vs 53 weeks), higher business rates and a pause in Stable Pizza’s expansion. We would use current weakness as a buying opportunity, expecting cost pressures to slow and earnings growth to pick up next year.
