Ahead of the Q1 IMS from Enterprise Inns, Jamie Rollo at Morgan Stanley forecasts 2% growth in like-for–like net income for the period, aided by weak comparables from the Waverley collapse and bad weather. He also says that in regards of a statutory code for tenanted pub companies, he doesn’t expect a final decision on the subject until after the next election.
He said: “H1 will be flattered by the collapse of wholesaler Waverley and bad weather. We expect Q1 LfL growth of 2%, ahead of our full year forecast of +1%, given it is the weakest comp of the year (Q1 2013 -4.4%) and it started strongly (positive even ex-Waverley for October/November according to the company).
“For the full year, we forecast revenue of £616m (-4%), EBITDA of £300m (-4%) and EPS of 17.9p (-6%), leaving us broadly in line with consensus. Enterprise announced with its full year results that long-standing CEO Ted Tuppen will retire on the day of the IMS to be succeeded by current COO Simon Townsend, but we are not expecting any strategic changes with these results. We see the shares getting further rerated as LfL income starts to grow, and we think the 50% discount to book value is unjustified. We remain Overweight.”
Enterprise generated £150m from disposals in 2013, which constituted 428 properties, of which 400 were considered to be underperforming tail end pubs (£116m, £290k each) and 28 were exceptional (£34m, £1.2m).
Rollo said: “The convertible bond issue reduces the need for as many disposals, which are dilutive to earnings, and it has guided to £70m disposal proceeds in 2014, of which £20m will be from its Unique estate. For 2014, we estimate average disposal proceeds of £275k, as it no longer has to sell “exceptional pubs” to stay within banking covenants.
Net bank borrowing had fallen to £41m at September 2013, helped by the £97m net bond proceeds. The company has prepaid some Unique securitized debt to ensure it can continue to upstream cash while it still needs to, meaning the bank debt covenant is much safer. We think this means the risk of a serious credit event has basically disappeared.
“While group net debt is down from its 2007 peak of £3.8bn to £2.5bn at the end 2013, net debt:EBITDA remains stubbornly high at 8.1-8.2x, as LfLs have been under pressure and pubs have been sold. However, with LfLs stabilising and FCF strong, we expect this multiple to start to come down. While Enterprise has not mentioned this as a possibility, it could choose to raise another corporate bond to pay off the £60m bond maturity in February, rather than use its cash. If it were to do this, it could pave the way to a small share buyback, though this is not something we are expecting.
“Pressure has been rising on the Government to implement the BISC’s proposed statutory code for tenanted pub companies, although we do not now expect a final decision until after the next election. We think a statutory code is unlikely to be introduced by this Government given the difficulty it would face with existing commercial contracts, the additional administrative burden it places on the industry, the likelihood of appeal by the pubcos, the risk some pubcos become pure landlords (or REITs?) and thus reduce tenant support, and the fact the current voluntary code seems to be working well (or at least needs more time to be tested).
“Enterprise has said it believes any statutory intervention would be ‘unnecessary, disproportionate, without reasonable foundation and potentially subject to multiple legal challengers’. London Economics published a report in December commissioned by the Government which showed a statutory code could lead to up to 1,600 pub closures and as many as 21,600 job losses, if a free-of-tie option were included. As a result, we do not expect the code to be implemented in the short term.”
