Leading analyst Geof Collyer has issued trading notes on six pub operators ahead of their results over the coming weeks.
Collyer, of Deutsche Bank, who has reduced his forecasts for all pub companies for 2013 in light of poor trading in March, has issued a Hold recommendation for Spirit Pub Company ahead of its H1 results on 25 April.
He said: “The group has reported +1.4% lfls for 28 weeks to 2 March (H1), where the latest 8 week period (lfls -1.1%) suffered the impact of the January snow. Spirit will be hoping that a good Easter has offset most of the expected negative March impact, but there is a tough Q3 lfls comp to get over as well (+3.7%).
“H1 net income was -2.9%, and improvement on the -4.5% for H1’12. The market will be focusing upon any financial update from the estate repositioning, though we may have to wait for the full year results in October for a better guide.
“Shares are 14% off the year’s high, but we see possible further downside based on the operational and financial gearing of any negative trading impact from March. With lfls possibly moving more into line with the industry from here, Spirit’s H2 will need to drive margin improvement to offset a tough start to Q3.”
Retaining a Buy recommendation for Greene King ahead of its full-year 2013 pre-close interim management statement on 29 April, Collyer said: “We have discussed the very weak comps for April for Greene King, though we may have to wait for 29 June’s final results for confirmation of the above sector average performance for the full year as the pre-close IMS usually reports up to the 50-week period.
“The group is hosting an analysts’ trip to the Midlands on the day of the IMS release so we see this as reasonable confirmation that nothing untoward is planned to be published – with analysts away from the office.”
Of Greene King’s Retail estate, Collyer said: “The Q3 IMS reported up to 6 January so the Q4 period will bear the brunt of the January snow, though we see the February and March bad weather as being unhelpful but not disastrous for the group, given its softer comp for April and London and South East geographic bias.
“Overall growth is being driven by robust performances from the food-led Old English Inns and Hungry Horse brands.”
In the tenanted and leased arm, Collyer pointed out that like-for-like profits were up for the core estate at the nine-month stage but overall profits were down, “and we do not see Q4 as helping to alter this situation much”.
Collyer reiterated his Hold recommendation for JD Wetherspoon, which reports its Q3 IMS on 8 May.
He said: “What concerns us most at JDW is that in recent years, the gap between lfl sales growth and lfl profits growth has widened significantly. This implies that the group is having to run very fast just to stand still in terms of absolute EBITDA performance: i.e. it could be having more difficulty in absorbing/passing on input cost inflation than most other pub groups.
“After getting lfl profits to flat in H1, the impact of March in Q3 is likely to send this back into negative territory for the group for the sixth year in a row.”
Collyer added: “After modestly beating consensus at the H1 stage back in early March, the focus will be on any change to guidance for the group that is the most operationally geared in the sector. The strong lfls growth run started in Q4’12 and has run at above 6% since then though management expects it to settle around 2-3% for H2, given the tougher comps. Hard at this stage to see outperformance.”
Collyer issued a Buy for Enterprise Inns, which releases its H1 results on 14 May. “A disappointing H1, but we still expect management to reiterate its target of flat net income growth for H2,” he said.
“We are forecasting net cash generation including disposals of £193m this year after all investment and £456m over FY’13E - FY’15E (was £198m and £465m respectively, pre-downgrade). This is equivalent to c88% of the current equity value, which is key for the BUY story.”
Collyer added: “The IMS for the 17 weeks to 26 January included the impact of the January snow, which combined with the one-off negative impact of the collapse into administration of the group’s wines and spirits supplier saw lfl net income fall -4.4%.
“We estimate that the continued poor weather for the group’s H1 period ending end March will have given the group little opportunity to recover from the end January performance. We see higher operating lease rent (+7%), higher depreciation (+8%) and higher repairs & maintenance spend (+11%) all helping the net income to fall by more than the combination of the drop in net income per pub and the reduced number of pubs.
“With stock trading at 66% discount to NAV, we remain buyers.”
For Marston’s, which reports its H1 results on 16 May, Collyer said: “With the shares trading above our target price and downside risk to consensus, the shares remain a Hold.
Of its Retail arm, Collyer said: “Marston’s has already highlighted the industry’s problems in mid January, though management didn’t adjust guidance. As we have discussed, the weather map for February and March looks like it would have been more unhelpful for Marston’s given its Midlands heartland.
“This recent difficult trading period may test the CEO’s claim that the geography of the group is less important than the ability to run good pubs. However, progress here is still being driven by the new build plan that has been the prime driver of the group’s recent profits growth.”
Collyer said he sees progress in its tenanted and leased estate “stalling” in Q2. Profits in the division were estimated to be +2% in Q1, “driven by investment in the franchise estate”.
He reiterated his Hold recommendation for Mitchells & Butlers (M&B), which announces its H1 results on 23 May, but said there could be some surprises in the outlook.
“There could be a number of conflicting features running through the business in H1, which is a 28-week period running to mid April. Traditionally H1 generates around 45% of the year’s EBITA, but this year, given the issues discussed in this note, a 45% / 55% split could prove a little optimistic.
“Some of last year’s announced savings should benefit H1, though margins were guided to be down slightly by the company. Half of Easter will fall into H1 vs. all of it into H2 last year, which might help offset some of the weather-related negative impact. In addition, new openings are weighted more to H2 vs. H1 last year.”
Collyer added: “The operating performance has been a little shy of the peer group of late. It is too early for the new ways of working programme to radically change the operating performance, but management may choose to update on progress to date, which could provide a pleasant surprise in terms of expectations for H2.
“Any signs of a turnaround in group performance relative to the peer group, where is has been slipping over the past year, will be crucial to M&B’s rehabilitation. A key task for the new CEO.”
