Leading analyst Douglas Jack has moved his recommendation for Enterprise Inns from Add to Hold due to “recent strength, valuation and the regulatory backdrop”.
Jack also said the Government should avoid implementing a mandatory free-of-tie option with an open market rent review, the mostly extreme proposal under the current plans for a statutory code.
Writing ahead of Enterprise’s Q1 interim management statement on Tuesday 6 February, Jack, of Numis, said: “We forecast like-for-like net income being up 1.5% in Q1 and flat over the full year, largely reflecting comps (which are easy in H1 and tough in H2).”
“Like-for-like net income should have benefited from soft comps (1Q13 -4.4%; 2Q13 -4.0%; 3Q13 -2.7%; 4Q13 0.6%), partly due to the collapse of wholesale supplier Waverley and poor weather in Q1 last year. Like-for-like net income was positive in early 2014E (as at mid-November) even before the impact of Waverley last year.”
Jack, who has a Target Price of 170p for Enterprise, also stated that “self-help is boosting growth”.
“Last year, 32% of capex was growth-orientated. This ratio should rise to 60% over three years, aided by a falling business failure rate (10.2% of pubs in 2013 vs. 12.9% in 2009). The latter should benefit from increased central purchasing (in areas like Wifi, Sky TV and food) for licensees’ benefit. ‘Managed tenancies’ are performing well: last year, the 185-strong Beacon estate generated 8% like-for-like net income.”
Jack said Enterprise’s share price “appears to be anticipating minimal change in regulation”.
“A strong case for retaining self-regulation has been made by the numerous companies, the Office of Fair Trading and London Economics. However, the Business Secretary said last week that statutory regulation is ‘necessary’ and that MPs would ‘soon hear’ the Government’s plans.
“A mandatory ‘free-of-tie option with open market rent review’, the most extreme scenario, should be avoided by this Government.
“Resulting in reduced scale economies, higher rents, less product range and less business support, it would increase closure rates. This, combined with the 500-pubs statutory code threshold (encouraging selling), could further undermine asset values. Despite all this, the free-of-tie option appears to be favoured by the Labour and Liberal Democrat parties.”
He added: “Next week, we expect to hold our forecasts (PBT £121m; consensus £120m), which allow for tougher comps in H2. We would take profits into strength from this trading update, reflecting: tougher comps in H2; regulatory risk; potential fall-out from Punch Taverns’ bondholder vote (either way); and valuation (the highest major tenanted disposal multiple over the last six years is 7.6x EV/EBITDA).”
