A leading analyst has said that he thinks consolidation in the managed pub sector would make a lot of sense.
In a note regarding Spirit, where he continues to be concerned about the group’s underlying FCF generation Jamie Rollo at Morgan Stanley said: “There are around 8,000 managed pubs, constituting around 15% of the UK’s pubs, but more like 40% of sales as these are generally large, branded, food-led outlets.
“The sector has a large number of players, the largest being Mitchells & Butlers (M&B) at 1,500 outlets. By comparison, the tenanted and leased pub sector is very concentrated, with Enterprise and Punch together having over 9,000 pubs, more than one-third of the sector.
“Bolting together large managed pub estates could lead to savings in central costs (these range from 4% to 6% of revenues, and perhaps half can be removed) and purchasing synergies (cost of goods c.30% of revenues, with perhaps a 5% saving).
“This means that savings could total 4% of sales, significant for businesses where operating margins range from 10% to 20%.”
On Spirit, Rollo said: “We remain cautious on Spirit as we continue to be concerned about underlying FCF generation, and think the debt re-profiling and capex cuts are a tacit acknowledgement of this. We cut PBT 8% on higher debt costs, but raise our PT to 70p as we roll forward and update for peer multiples.”
Rollo said that the company’s recent results were a “touch disappointing”.
He said: “£54m F13 PBT was a little below our/cons. estimate of £55m, and the £56m at the start of the year, despite the boost from Q4’s warm weather and a £3m reduction in central costs. Within this, Leased profits were slightly better than expected (although LfLs have yet to turn positive) and Managed worse, as underlying trading looks to be slowing as capex levels normalise (expansion capex -70% in F13).”
The planned debt re-profiling leads Rollow to reduce his F2014-16 EPS forecasts by 6-9% as interest costs increase, but his EBITDA forecasts remain broadly unchanged.
He said: “We see additional interest costs if the new A6/A7 bond offer sees a higher take-up than Spirit expects (we reflect Spirit’s assumption of 70% take-up).
“Our bear case rises but is half the current share price. Given the debenture will be able to continue to upstream a dividend to the PLC, we no longer think it is fair to consider a bear case as just the PLC cash value. We get to our new 35p bear case by adding the present value of the £20m p.a. upstreamed cash, the F14e PLC cash, less the onerous lease and pension liabilities.”
