A leading analyst has said that although the tenanted and leased (T&L) pub sector has taken the longest time to stabilize and then turn around of any other, there are signs that certain group’s are just about there in terms of like-for-like profits.
Geof Collyer at Deustche Bank said: “The T&L sector has been the hardest hit in the last four years and has taken the longest time to stabilize and then turn around of any of the pub sector’s businesses. Both Marston’s and Greene King are just about there, in terms of like-for-like profits stability, with Enterprise Inns getting closer.
“Both Spirit and Greene King are deliberately reducing the scale of their T&L estates, whilst Marston’s is looking to broadly retain its shape. It is a bigger issue for Marston’s as well, given that the T&L estate is the biggest of its three profit centres and therefore needs to be sorted and turned around. Spirit has a greater exposure to T&L profits on a relative basis than Greene King but this could equalize over time”
Collyer said that we would not know which group has the best strategy for its T&L estate for a year or so, though he would favour the one which improves the returns relative to book value and delivers an improving like-for-like profits trend.
He said: “All three have taken the view that greater control of the customer-facing offer is important for a material section of their T&L estate. It is more a question of how much resource to devote to the problem and where the greater risks lie.
“For example, by our reckoning, Marston’s should have invested around £90m of development capex by end 2014E, yet total EBITA will only have moved by £7m. Because operating lease rent payable is around 34% of total EBITDAR at Spirit compared to 4-5% at Greene King and Marston’s,
“Spirit is more operationally geared as a group, and also has significantly lower fixed charge cover (1.5x) than either Greene King (2.7x) or Marston’s (2.1x). Therefore we see its business model as being more
vulnerable to a downturn than any other pub stock we follow apart from Punch Taverns.
“It is also trading on a meaningful premium in terms of EV/EBITA compared to its peers: 16% vs. Greene King; 11% vs. Marston’s; and 27% vs. JD Wetherspoon, which has a more comparable freehold / leasehold mix of properties in its managed estate to Spirit.”
