Leading analyst Geof Collyer has upgraded his earnings per share (EPS) forecast for Spirit Pub Company, saying the group is “moving higher up the pecking order” following its above-expectations trading update, although some concerns remain.
Collyer, of Deutsche Bank, issued a Hold recommendation at a 100p Target Price for Spirit, which this week reported a 2.1% rise in like-for-like net sales in its managed arm for the 12 weeks to 16 August, with net income growth in the leased division accelerating to +4.8%.
Collyer said: “In our April note (“The chips are up”), we highlighted Spirit as one of the most operationally geared stocks in the sector. It had potential to outperform its peers if this operational gearing came through, but we had reservations regarding the quality of its balance sheet and some key financial metrics.
“Although we have upgraded our forecasts in this note, we retain our concern over the balance sheet, and so far potential operational gearing in the Retail division is being offset by higher costs. Nonetheless, the group’s overall performance - especially in the Lease estate - is ahead of our expectations, moving Spirit higher up our pecking order of preferred stocks.”
He said Spirit’s Q4 like-for-likes were above his expectations for both divisions.
“FY lfls were +10 bps better than DBE in Retail (+4.4%), and +90 bps better in Lease (+4.2%).
“Management expects to deliver full year results ahead of market expectations. We see this principally coming through in the Lease estate relative to our pre-Q4 forecasts. As a consequence, we have upgraded our EPS forecasts by between +2% and +5% for the next three years.”
Collyer added: “We set our price target on EV/EBITA valuation, using FY’15E, in line with the rest of the sector. We use a 12.5x multiple to derive our target price. This target multiple is lower than some of the other stocks, reflecting a half way house between the pub groups that are more geared to operating leases in the sector and those that are asset rich.
“Key upside risks include (i) maintaining the material lfl sales performance in the face of tougher comps; and (ii) a major recovery in the profitability of the pubs that have returned to Spirit via the reversionary lease process. Key downside risks include the failure to turn around the underperforming tenanted and leased estate, creating further pressure on the retail performance.”
