A leading analyst has described Greene King’s sale of 275 non-core tenanted and leased pubs to Hawthorn Leisure for £75.6m as “dilutive, but strategically right”.
Douglas Jack at Numis said: “Although the deal is strategically right, in our view, it has resulted in a 3% downgrade to our 2015E forecasts. We are cutting our recommendation to Hold (from Add) reflecting recent strength and our expectation that earnings growth will be muted over the next year.
“The pubs, which generated £12.4m of EBITDA last year (£45k per pub) are being sold for £275k per pub, a multiple of just 6.1x EBITDA, lower than the 7.6x that Marston’s sold 202 leased/tenanted pubs to NewRiver Retail in November 2012. Given the good quality of Greene King’s estate, this multiple does not provide a positive read-through to Enterprise Inns, which is on 10.2x EV/EBITDA.”
Jack said he was downgrading his 2015E PBT forecast by £5.6m (3%), to £177.5m from £183.1m (consensus: £183.0m).
He said: “The full year impact should be a £10.5m reduction in EBIT vs a £4.7m reduction in interest. For a company that usually generates 8-10% earnings growth, this transaction is likely to wipe out half the company’s growth in 2015E (a 52-week vs 2014E’s 53-week year).
“On the positive side, the deal is consistent with the plan to reposition the company into higher growth areas (food-led managed pubs) and reduce the tenanted estate to 750 pubs (the previous target was 1,200). We therefore expect single-site tenanted/leased disposal activity to slow (reducing dilution) and managed expansion to pick up further (providing scope for upgrades).
“We are holding our 975p target price as we believe earnings quality and scope for future upgrades has improved; the company’s re-positioning strategy is right, in our view. However, we are moving our stance to Hold to reflect recent strength and our expectation that earnings growth will be muted over the next year.”
