Spirit Pub Company is likely to introduce its new premium concept to another “two or three” sites “fairly quickly” before assessing the possibility of a wider rollout in early 2014, chief executive Mike Tye has told M&C Report.
He also revealed that its Taylor Walker concept will be segmented into two styles: one aimed at tourists, and the other at residents.
Spirit opened its trial premium concept at the George in Belsize Park, north London, a couple of weeks ago. Tye said trading has “started really well”. “We set some pretty challenging targets for the guys and they are already up there or there abouts.”
“We always said we would do one just to make sure everything we had in theory was working right.
“We have a number of sites that we know are next on the list. I expect to another two or three fairly quickly and we’ll sit back and assess [the impact].”
A further rollout could commence in early 2014. Asked how many he believed could be converted to the format, Tye said: “I think until we have a decent number under our belt we don’t know the capacity of the concept.”
He said that a more premium style would be adopted to Taylor Walker and Chef & Brewer anyway.
On plans to segment Taylor Walker, Tye said the core of the offer would remain the same, but the tourist-focused sites would be more classic in style with a greater focus on traditional British food and drink, The version aimed at residents and workers would be “more contemporary and premium”.
Spirit invested £1.5m on trials of nine franchise sites in the half-year, with plans to expand to 16 in H2.
Spirit this morning said 86% of its estate is now invested and branded and Tye expects the rest of the estate to be completed this year. This year it is to finish the remaining Fayre & Square and Flamin Grills.
Average spend on investments is now lower than the previous figure of c£200,000 as Spirit “learns more tricks”. Tye said Spirit has been undertaking “value engineering” since January to get better value for money.
A “refresh” programme on the estate is due to begin shortly, with typical investments of £20,000 to £40,000. “The early signs are very encouraging.”
The John Barras concept has been the focus on the franchise conversions, but Tye didn’t rule out using other Spirit concepts. He said profit and loss in the franchise sites are positive for both Spirit and the franchisees.
Tye was critical of the Government’s plans, confirmed on Monday, to implement a statutory code and code adjudicator in the pubco/tenant relationship.
“Overall I think it’s disappointing. I think the work the industry has done with Government to get the code in place was done really well. I don’t think the Government has given that time it should.”
He said Business Secretary Vince Cable “is adding increased complexity for both us and the licensee” and the move adds “more question marks of the viability of a number of pubs”, especially if more free-of-tie options are forced on the sector.
Tye added: “We are not going to sit on the sidelines. We are going to contribute fully and persuade the Government they have got this wrong.”
Analyst reaction
Douglas Jack at Numis said: “We are holding our FY forecasts (PBT £56.2m; consensus £55.6m), which anticipate 15% PBT growth in H2 (vs 23% in H2 2012), aided by easy weather-related comparatives.”
In terms of its managed estate, Jack said: “We are maintaining our 2.3% full year assumption: trading should have been very strong in April; and weather-related comparatives will be easy for the rest of H2.
“Rebrandings (50 in H1; 60 in H2) continue to beat the 25% CROIC hurdle rate, but capex should soon switch to a "refresh" programme of 250 £25k refurbishments pa over a three-year cycle.
“Managed EBITDAR margins rose 130bps in H1. Higher costs were offset by central cost savings and higher food margins. The latter benefited from better management information from new IT systems. Yesterday, we met the supplier of these systems: the systems tend to pay back in 3-6 months (from gross margin management) with labour optimisation to follow.”
Even though LFL net income fell 4.8% in March, Jack continues to expect LFL net income to be flat in H2 due to less rent-rebasing and easier comparatives.
He said: “Net debt/EBITDA fell to 5.1x (from 5.3x) even though debt rose by £31m, all due to a working capital outflow that should reverse in H2. Cash and bonds at PLC fell to £62m (from £77m), undermined by the working capital outflow, hence we expect PLC cash/bonds to still be £62m at year-end despite the dividend becoming progressive (up 5%) in these results.
“Of the pub stocks, we estimate Spirit offers the strongest PBT growth (10%; 17% prior to reductions in onerous lease utilisation). In our view, this growth, improving trading prospects and c.£70m of cash tax credits are not fully reflected in the valuation (EV/EBITDA 7.4x; peer group average 9.0x).”
Nick Batram at Peel Hunt said: “H1 was tough, and the poor weather in March means H2 has got off to a difficult start. However, there is enough evidence of underlying progress to give us confidence that the group can ultimately deliver. Comparatives become easier from here as well. Given this, we believe the valuation is attractive and we retain our Buy recommendation.
“The progress made in H1 from a bottom line perspective is not what we had been hoping for six months ago, but against a tough trading backdrop there is enough to suggest that the business will ultimately get there. Excluding March (where the weather led to a 4.1% decline in Managed LFL) H2 benchmarks are less demanding. This, together with the improvements coming through from EPOS and backend systems, means that the full-year expectation is still achievable. Given this and the valuation, we continue to believe the shares offer good value.”
