Jamie Rollo of Morgan Stanley looks ahead to Enterprise Inns’ Q3 interim management statement on 7 August, saying he expects like for like net income to be up 1.5%, boosted by the Easter shift, the World Cup and good weather.
The company had a “solid” first half of the year, according to Rollo who said weak comparisons from 2013 attributed to the collapse of wholesale group Waverley and poor weather in H1 2013 resulted in like for like net income up 1.1%.
Rollo said Easter falling in H2 this year should provide a boost in Q3, and also anticipate a boost from the World Cup and recent hot weather.
“We expect Q3 LfL net income to grow c.1.5%, slowing to flat in Q4 as comps are tougher. For the full year, we expect +0.9% LfL net income, revenue of £629m (-2%), EBITDA of £300m (-4%) and EPS of 17.8p (-6%), leaving us broadly in line with consensus at £626m, £302m and 18.4p.
“We remain Overweight on Enterprise as we have growing confidence it can return to sustainable positive LfL growth, its debt levels are more manageable now, and we think its c.50% discount to book looks unjustified. The shares trade on a calendarised 2015e P/E of 6.5x, 9.9x EV/EBITDA, with a 19% FCF yield.”
“LfL net income rose 1.1% in H1, considerably better than 2013’s -2.9%, partly boosted by weak comps. Q2 saw 1.5% LfL growth, following +0.5% in Q1, with the improvement encouraging given Q1 was the weakest comp of the year (-4.4% first 17 weeks of 2013), hit by the collapse of wholesaler Waverley (£1m / 1% from profit last year) and poor weather (£1.5m / 1.5%).”
“While the 1.1% H1 growth rate is fairly low, it is a big improvement after 6 years of declines, and as half the income is rent and nearly another half commission on selling beer, it will not generate the sorts of growth rates enjoyed by retail operators. Enterprise highlighted more challenging comps in H2 at the interims, but said it continues to target LfL net income growth in H2, and that the first six weeks delivered LfL net income growth. We are encouraged by recent trends in the industry, with Spirit Leased reporting 5.3% LfL net income growth in the 12 weeks to 24 May, and Greene King Leased LfL net income +3.5% in May-June.
“For the full year, we forecast 0.9% LfL net income growth, and the company needs +0.7% in H2, which seems reasonable. Given the Easter shift, tougher comps in Q4 and looking at 2-year growth trends, we expect LfL net income growth of c.1.5% in Q3, and closer to flat in Q4.”
Enterprise disposed of 129 pubs for £42m by the end of H1 and will reinvest the proceeds to drive LfL net income growth and improve financial returns on its retained estate. These together with the convertible bond issued at the end of last year reduced the need for as many disposals, particularly of “exceptional pubs”, to stay within banking covenants.
Rollo said: “We expect £70m disposal proceeds for the full year, in line with company guidance, meaning it has to sell another £28m beyond what it sold in H1.”
“Net bank borrowings had fallen to £76m at the end of H1, down from £104m at the end of Q1, and £266m a year ago. The company has prepaid some Unique securitised debt to ensure it can continue to upstream cash while it still needs to, meaning the bank debt covenant is much safer. We think this means the risk of a serious credit event has basically disappeared. While group net debt is down from its 2007 peak of £3.8bn to £2.5bn at the end of H1, net debt/EBITDA remains stubbornly high at 8.0x, as LfLs have been under pressure and pubs have been sold. However, with LfLs stabilising and FCF strong, we expect this multiple to start to come down, and forecast an 0.2x reduction in FY15.”
