A leading analyst has said that too much emphasis has been placed on recent poor weather and if, as he expect, companies across the sector can absorb this impact with minimal impact to forecasts, the growth implications for the next 12 months is positive (even if the weather is poor).
Douglas Jack at Numis said that of the pub stocks, he estimates that Spirit offers the strongest PBT growth (12%; 20% prior to reclassifying onerous leases into the P&L). He said: “In our view, this and c.£70m of cash tax credits is not fully reflected in the valuation.
“[Spirit’s] H1 results are due on Thursday 25 April. We forecast PBT to be up 5% to £20.4m, held back by poor weather, but expect: to hold our forecasts of 13% PBT in H2 (last year, PBT rose 7% in H1 and 23% in H2; 60% of its profits usually occur in H2); and the dividend to increase. With easy comparatives ahead, we would Buy the shares.”
Spirit’s managed pub LFL sales rose 1.4% in H1 (vs a comparative of 5.6%). Jack said: “Our full year assumption of 2.3% LFL sales requires growth of 3.2% in H2, which we believe is achievable against an easier weather-affect comparable (of 4.0% LFL sales). In addition, sales should benefit from: better product range; rising guest advocacy; and the utilisation of better management information from new IT systems.
“We believe managed margins are still on track to rise c.100bps this year, boosted by the addition of more premium products and efficiencies from new IT systems. Both LFL sales and margins should benefit from rebrandings continuing to beat the 25% CROIC hurdle rate. 50 major investment projects were completed in H1 and a further 80 projects are due to complete in H2.”
The group’s leased estate LFL net income fell 2.9% in H1 (2012: -4.9%).
Jack said: “Our forecast assumes LFL net income falls 1.1% in 2013E, with H2 flat due to: less rent-rebasing; better retail disciplines; online ordering; and the use of iDraught dispense systems.
“Misplaced concerns. 1) ‘Restaurants are trading better than pubs’: food pubs have outperformed restaurants over the last three years, but have suffered more when the weather is poor. 2) ‘FCF at PLC is negative’: only slightly, but there is £77m of cash and bonds at PLC as well as c.£60m of bond cash, most of which can be upstreamed. 3) ‘Managed sales growth will slow post rebranding’: this is a concern for 2015E, but if the A1/A3 bonds are refinanced, capex should be maintained to limit any slowdown.”
