Trading for Enterprise Inns’ is “nearing its trough” and the company’s valuation is “out of kilter” with the wider retail estate sector, according to leading analyst Alistair Macdonald.
Issuing a Buy recommendation for the pub company, Macdonald, of investment bank Espirito Santo, said: “Enterprise Inns shares many attributes with a property company but the market is not valuing it like one. Instead, it is being penalised over concerns for the wider pub industry and its high leverage.
“We think trading is nearing its trough and an improvement from here should support the estate valuation and interest cover ratio. With that in mind, we believe that Enterprise Inns’ valuation looks out of kilter with the wider real estate sector, even after factoring in another property impairment.”
This is based on the idea that the market will start viewing Enterprise’s valuation against the UK real estate sector, with falling beer volumes and a loosening of the tie meaning wet rent will make up a smaller proportion of the company’s income.
Macdonald estimates Enterprise’s EPRA net asset valuation (NAV) to be 199p, a “significant premium” to the current share price of 73p.
He plotted Enterprise’s loan-to-value against price/EPRA NAV against companies in the wider retail market to conclude that the pub company is “trading at a significant discount”.
“Leverage at Enterprise Inns is higher, but our work on interest cover ratios suggest it is not an outlier. Instead the discount is partially due to a lack of REIT status, lack of dividend and moreover a reflection of concerns over trading and debt levels.”
Meanwhile, trading for the company is “on the cusp of improving”, Macdonald said. The industry “seems to be stabalising” and, crucially, Enterprise’s dry rent “is steadily improving and is central to the property valuation”.
Macdonald gives a “prudent” estimate of an 8% underlying impairment for Enterprise, but said: “As long as it is no worse than our estimate then any share price weakness could be a buying opportunity”.
He also believes that Enterprise could return to the option of REIT conversion, “essentially reducing the effective tax rate to c.7% and clearly a positive for the group”.
In addition, he said a return of a dividend or share buy back in FY2012 is “clearly a possibility”. He said the future of the beer tie is “in the hands of the pubcos” although a “worst case scenario” could be “a material change by Government could substantially impact the group’s profitability”.
