Peel Hunt analysts Douglas Jack and Ivor Jones give their views on Shepherd Neame ahead of next week’s trading update, saying that in their view the tenanted and brewing sides of the business have the best chance of beating forecasts.

Upgrading the company from Add to Buy, the analysts said: “For Wednesday’s prelims, we forecast PBT being flat, at £11.2m, due to tough managed pub comps of 8.1% over the full year (and 11% in H2). However, trading conditions were favourable during Q4 and into early 2019E, leaving the risk to forecasts slightly on the upside, in our view. Despite this, low leverage, and a well-positioned, freehold estate in south-east England, the shares have de-rated from a premium to a 25% discount to NAV.

“In H1, managed LFL sales grew by 2.1% against a comp of 5.3%. LFL drink sales (+2.3% vs 5.6% comp) and accommodation (+6.4% vs 9.6% comp) exceeded food (+0.2% vs 3.3% comp). Accommodation occupancy remained at 82.5%, with RevPAR up 3% to £72. For the full year, our forecasts assume LFL sales rise by 2.0%, despite facing a comp of 11% in H2.

“In H1, managed EBITDA margins fell by 180bps as the estate needed 3-4% LFL sales to cover cost inflation. The company expected H1’s pace of cost inflation to continue in H2, hence we forecast managed EBITDA margins falling by 80bps over the full year.

“In H1, tenanted LFL EBITDAR rose by 2.1% (1.7% comp), with average EBITDA up 5.7% (H1 2017: +5.3%), with 13 fewer outlets due to disposals and one site transferring into the commercial leased estate. Over the full year, we forecast average EBITDA rising by 6.3% (LFL +2.5% vs 1.4% comp). 

“Shepherd Neame is continuing to invest strongly in its estate (maintenance capex was up 5% in H1) and employees. In the managed estate, this includes one major project in H1, with three more due in H2, and the ongoing roll out of the new signage scheme.

“Brewing turnover grew by 4.2% in H1, with EBITDA up 28% to £2.4m due to overhead reduction. With the Asahi brewing contract having ended in January, our forecasts cautiously assume minimal brewing EBIT in H2. However, the company has a strong opportunity to grow own-brand volumes, which were up 4.2% in H1 (in a market down 0.4%).

“ There has been concern in the press about the risk of beer prices rising due to higher barley prices. However, barley is one-fifth of the ingredient cost of beer, and the total ingredient cost amounts to less than 10% of the price of a pint. Thus, we estimate a 3-4p increase in price would hold the cash margins before considering the benefit of forward purchasing.

“We believe Brewing and Tenanted have the greatest chance of beating 2018E forecasts, with the latter having softer comps, being positioned to benefit from favourable weather and typically contributing 55% of group EBIT in an average year. With high quality, well-positioned, premium outlets and brands, Shepherd Neame’s NAV/share increased by 3% to £13.11 in H1 2018, and is forecast to reach to 1,467p in 2020E.