A leading analyst said he expects tougher LFL comps (Q4: 4.1% / Q1-3: 0.7%) for Spirit Pub Company, which should reduce LFL sales to c.2% in Q4 and to 4.0-4.5% for 2014E, but states that the company’s momentum is strong and the sector backdrop has been fine.
Ahead of the group’s full-year trading update next Wednesday, Douglas Jack at Numis said: “In our view, consensus forecasts and the valuation (2015E EV/EBITDA: 7.2x) anticipate a sharp trading slowdown in Q4 due to tough comps. We expect to at least hold our PBT forecasts (2014E: £57.4m / consensus: £56.2m) and believe there should be upward pressure on consensus.”
Managed pub LFL sales rose 5.2% during the first 40 weeks (to 24 May), driven by improving estate/brand quality, digital marketing and rising service standards, with food up 4.8% and drink up 5.2%.
Jack said: “Price, volume and average spend were all in growth, with London and value food pubs continuing to outperform. We forecast FY managed EBITDA margins to be up 36bps (vs. 31bps in H1) with slowing food cost inflation offset by the start of the Carbon Levy (at a cost of £2m pa) in early H2.
“In theory, tougher LFL comps (Q4: 4.1% / Q1-3: 0.7%) should reduce LFL sales to c.2% in Q4 and to 4.0-4.5% for 2014E (our above-consensus full year forecast is 4.0%). However, the company’s momentum is strong and the sector backdrop has been fine. In June-July, the CGA Peach Tracker rose an average of 1.3% and Spirit usually outperforms this index by 2-3% points.”
Leased LFL net income rose 3.6% during the first 40 weeks (vs. our 2.5% full year forecast), aided by investment, training and innovative agreements.
He said: “Due to the reasonable weather and FIFA World Cup, there is a reasonable chance that the assumed slowdown in Q4 has not materialised.”
The Flaming Grill conversion programme is accelerating, with 50 projects due for completion by spring 2015.
Jack said: “These lower-capex investments should boost cash returns, which averaged 28% in the 42 months to February 2014. This process should benefit from the possible acquisition of 19+ sites from Orchid’s administrator. According to the trade press, Spirit has already started acquiring and converting these profitable sites, from which we estimate it could achieve a 50%+ cash return post-rebranding.
“Despite generating the strongest earnings growth over the last two years, Spirit has the lowest valuation in the licensed retail sector. In our view, this reflects limited understanding of the company’s growth prospects, which are underpinned by falling net debt/EBITDA (to c.4x) and growing cash reserves, including cash in the Spirit debenture, which the company has full access to.”