Leading analyst Douglas Jack has predicts that Enterprise Inns will report a c3% fall in like-for-like net income at its full-year results on Tuesday, and predicted its shares are “likely to have a flat year” in 2014 if like-for-like net income growth does not occur.
Jack, at Numis, issued an Add recommendation for Enterprise and a 170p Target Price. He said: “For Tuesday’s full year results, we are forecasting PBT to be down 11% to £122m (consensus’ has slipped to £119m in recent weeks). Like consensus, we forecast like-for-like net income to be down c3%, with both EBITDA and net debt down c7.5% (partly due to disposals). Our 170p target price is dependent on a return to like-for-like net income growth in H1 2014E.”
He said like-for-like net income should have improved from c-3.5% after 44 weeks.
“Our full year forecast assumption of -3% like-for-like net income requires a flat outcome in Q4, below management’s positive like-for-like net income target. In the company’s favour, the underlying like-for-like trend (excluding extreme weather and one-off events) improved from -2% in H1 to -1% in Q3; and Q4 should have benefited from better like-for-like weather and easier comps.”
Jack highlighted a number of “self help” initiatives to drive trading. “Investment has become more growth-orientated (in 2013, 900 pubs should have benefited from external decoration); centralised supply of Wifi and Sky TV have saved participating tenants £3.5k pa on average; and more tenants are buying food (with central discounts) through the Brakes Pub Club.”
He added: “Non-contractual support costs have started to level off and the number of business failures fell 19% in Q1-3 2013 (in 2012, business failures cost £29m). Operational initiatives, ongoing disposal activity (now focused solely on the tail of the estate) and easy comps should help these trends to improve further in H1 2014E.”
Regarding its balance sheet, Jack said: “After 44 weeks, Enterprise had effectively sold 356 pubs for £127m, with £150m of proceeds targeted for the full year. Although net debt:EBITDA should be c.8.0x, we believe there is no foreseeable risk of bond cash trap and bank debt should now be below £50m following the recent £97m convertible bond issue.”
Jack added: “After two years in which the shares have risen 390% and earnings have fallen 20%, commentators may start valuing Enterprise on NAV relative to the UK property sector (despite the differences in political risk, regulation and licensing constraints). In reality, if like-for-like net income growth does not materialise, the shares are likely to have a flat year in 2014E, in our view.”
