Leading analyst Douglas Jack has reiterated his Buy recommendation for Spirit Pub Company after it reported an acceleration in like-for-like trading this morning, and said it deserves another re-rating.
Jack, of Numis, who issued a Target Price of 110p for Spirit, said: “Trading has accelerated in both divisions with managed like-for-like sales up 6.1% and leased like-for-like net income up 6% during the eight weeks to 1 March. As a result, year-to-date trading has moved further ahead of our above-consensus assumptions and management has stated it is ‘confident that the managed estate will continue to go from strength to strength’.
“Managed pub like-for-like sales rose 4.8% in H1 (28 weeks) with food up 4.8% and drink up 4.3%. During January and February: like-for-like food sales rose 6.7%; like-for-like drink sales rose 5.5%; machines and Wacky Warehouse admissions were both strong; and accommodation was positive. Mild weather helped recent trading, but like-for-like sales remain consistently 2.5%-3.0% ahead of the managed pub/restaurant sector (Peach Tracker).”
He said the strong trading “largely reflects brand improvement and rising service levels, with Taylor Walker, Fayre & Square and Flaming Grill outperforming”.
“As volumes, prices and average spend are all in growth and net cost inflation is at just 2%, margins should be up (our forecast assumption is for a 40bps increase).”
He added: “Leased like-for-like net income rose 2.6% during H1 and by 6% during January and February. Changes in the supply network ordering process caused some sales to have been brought forward into H1. Without these changes, like-for-like net income would have been up 2.2% in H1 and 4.6% during the last eight weeks.
“Excluding the benefit of better weather, like-for-like net income would still be positive, driven by better asset quality, product, training and support.”
Jack continued: “We are holding our 2014E forecasts (PBT £57.9m; consensus £56.2m), which assume 2.5% managed like-for-like sales (guidance is 3%), 0.4% leased like-for-like EBITDA growth (similar to company guidance) and the acquisition of five pubs in H2 for conversion to Spirit’s brands, mostly Flaming Grill. Our forecasts allow for tougher comps in Q4, although underlying momentum is pointing to potential upgrades.
“Spirit’s ongoing operational outperformance against all its national competitors should justify at least a sub-sector average EV/EBITDAR rating (10.9x), rather than the lowest rating (9.4x) in the sub-sector, in our view. We believe Spirit’s stronger growth, bolstered by a gradual move into expansion, and the diminishing relevance of its OLP should now lead to another re-rating.”