M&C Report takes a closer look at this morning’s interims update from Enterprise Inns and talks to chief executive Simon Townsend and finance director Neil Smith about the group’s move into the managed arena, the promising progress of Project Beacon, innovation across its agreements, its disposal plan and investments. Also includes analyst reaction.
Managed move
M&C Report revealed last week that Enterprise has made its first move into the managed sector with the conversion of the St James’ of Bermondsey, London, into a managed pub under the Bermondsey Pub Company venture. Regarding his plans for that venture, and for the move to managed pubs in general, Townsend told M&C Report: “We genuinely have no expectations at all. Indeed with that pub, what we’ve done is no different to what we would have done were we to operate it with an individual lessee or tenant, other than we’ve been a bit more prescriptive because we are running it ourselves. We have no preconceived idea about whether that’s the right model for that pub and were we to move it back to the leased or tenanted estate over a period of time that might well be the outcome.”
Agreement innovation
Asked about whether Enterprise has plans to operate franchise, franchise-style or other forms of agreement, Townsend emphasised that the company would take a flexible approach.
“There are a number of different options out there, where you can go from completely commercial lease agreements that are more like a property lease through to turnover related rents, or agreements that have more of a defined franchise offering with them, or self-employed managers or even fully managed operations. I think there is great flexibility out there. We are simply exploring those options in order to determine which, if any, might be applied to our business.”
Beacon
Enterprise said it had 180 sites under the Beacon managed tenancy format at the period end. “We don’t really have an expectation for number of pubs to operate in any particular format, and the fact is we’ve been operating Beacon for three years now and still only have 180 pubs in that population - albeit a population that’s moved over time,” said Townsend. “It really is a case of looking at each individual pub and deciding what works best, really.
“What we have proved with the Beacon concept is that a more defined, a more structured, a more managed tenancy-style approach where we are more directive in terms of what the offer is, the pricing, the support packages, the way the pub is operated, has undoubtedly had some impact; particularly in the kind of business that’s a bit smaller, a bit more wet-led, a bit more value-led.
“What we are saying is that where there are opportunities for us to be more directive, be more structured in terms of the framework, we are prepared to look at that, including in businesses that may have more of a food offer than the Beacon pubs have at the moment. So we’re open minded. What we are prepared to do is be flexible and explore different operating models in order to build our understanding of what the implications of those sort of businesses may be for us.”
Smith pointed out that the number of pubs on the Beacon agreement has fallen from a high of 250. He said Beacon is “almost like a transitionary state” for venues. “It’s not that we want a ‘brand Beacon’. It’s about helping our publicans better understand now to run a pub and then releasing them to have the where with all to do it on their own.”
Trading formats
Enterprise had begun developing trading formats around defined retail offers such as grilled food and sports. Townsend described these are more akin to “design treatments”. “We didn’t really extend those into practice in the estate. We were looking at design and presentation at the time and very quickly we came back down to the point where we stuck to our knitting and got on with the Beacon ones because they were working most effectively.” He said there are no plans to implement these templates.
Disposals
Townsend said he expects to dispose of another c100 pubs during Enterprise’s current financial year, leaving around 200-230 disposals for the full-year, generating c£70m; 129 were sold in H1. “We think in future years [it will be] £60-or-so million and between 180 and 200 pubs per year.” Of the 129 disposals all but eight were underperforming sites, with those eight generating a premium on disposal.
Enterprise has generated c£330,000 per disposal so far this year. he said this compares to around £275,000 per site in Greene King’s recent sale of 275 sites to Hawthorn Leisure.
“The big difference is that all of our disposals have been done individually and we’ve continued to find interested buyers across the country for our pubs.
“We will come forward with disposal sites as and when we no longer believe the pub has a sustainable future. We’ve been doing that individually for some time now and I think that’s our preferred approach going forward.”
Smith said he believes the improvement in the general property market has helped with the disposal programme because “a lot of our assets we’re selling at the tail end are quasi-residential properties”.
“A couple of years ago there wasn’t a lot of appetite or funding for it, but there seems to be much more for that now. Also there are fewer assets to sell than there have been in the last few years - we are selling fewer pubs than we have been and Punch has been selling fewer pubs than it has been - because the two big companies now have worked their way through the most significant elements of their tail. There’s less supply and stronger demand and that is really helping at the tail end of the market.”
Investments
Regarding Enterprise’s approach to its pub investments, Townsend said: “Last year there was a lot of activity around kerb appeal. We did almost 1,000 exterior decoration scheme during the course of the year. This year there’s been some smaller, lighter sparkle schemes but there has been quite a lot of significant schemes. We’ve done 326 schemes averaging just over £40,000 each, 15 over £100,000, 21 between £50,000 and £100,000, so some very significant sized schemes where we’re really adding facilities; we’re adding kitchen and catering facilities, adding additional trading space, really driving our investment behind those sorts of things that encourage more customers to come, stay longer and spend more. Food is clearly a very prevalent feature in all of that - something like 87% of our pubs now have kitchen facilities therefore offer food. Important growth drivers like food and dwell time have very much been the feature of our investment activity.”
Townsend said that the proportion of food sales out of overall sales currently stood at between 25% to 27% across the company’s estate but that he expected to see that grow and that its tie-in with Brakes to gain more traction. More than 325 Publicans now belong to its Enterprise Food Club with Brakes and they are able to access discounts of up to 30%, as well as additional incentives and support.
Enterprise reported that the proceeds generated from the disposal of under performing pubs - 129 in the period - was directly invested into the estate in “growth-driving initiatives”. The proportion of capex on growth driving initiatives stood at 33% in H1, and Townsend hopes to grow this “closer to 40%” for the rest of the financial year.
He said that the company is less reliant on disposals to repay debt.
Trading improvement
Townsend said the growth in like-for-like net income in H1 (+1.1%) was “to an extent flattered by the relatively softer comparisons that we have after a couple of difficult quarters this time last year”, notably as a result of the collapse of Waverley TBS and “some particularly challenging weather comps”.
He added: “But we also had some pretty extraordinary weather conditions in the first half of this year, particularly with the extensive flooding, so those probably balance themselves out. We are back now to normalised trading of our wines and spirits business.” He pointed out that Easter was in H1 last year but fell in H2 in 2014. “By the time you look at all those things and cancel them out we are still encouraged to see growth in the business and that growth continuing in the first six weeks of the second half.”
The company said that all its geographies had reported improving trading trends with the North and the Midlands flat against declines the previous year and the South (from where it derives 42% of its income) up 2.7%, aided by a 4.2% increase in sales in London where it operates over 750 sites.
Analyst reaction
Douglas Jack at Numis said: “H1 PBT was flat at £55m (we forecast £55m; consensus £55m) with LFL net income up 1.1% against easy comps of -4.2%. The company is making gradual progress in many areas, helping the business failure rate to slow to an annualised rate of c.8.5% of pubs, but: EBITDA is still falling as quickly as net debt; wet-led pub beer volumes are continuing to fall; and, with a regulatory overhang, valuations are questionable.
“Regulatory overhang remains. According to BISC, there is “still sufficient time in this Parliament to implement our final proposals” in relation to the Statutory Code. Although we expect a mandatory ‘free-of-tie option with open market rent review’ (favoured by Labour and the Liberal Democrats) to be avoided at this stage, this threat is adding to selling pressure in the tenanted/leased pub market.
“We are holding our full year PBT forecast (£121m; consensus £120m), which anticipates flat LFL net income, allowing for tougher H2 comps (H1: -4.2% / H2: -1.7%). We would take profits, reflecting: wet-led pub market beer volumes continue to fall by 9% pa; regulatory risk; and valuation, highlighted by Greene King’s disposal on 6.1x EV/EBITDA. Enterprise’s valuation is 10.6x (of which net debt/EBITDA is 8.0x).”
Mark Brumby at Langton Capital: “Langton Comment: Enterprise Inns has once again reassured that recent positive trends reported across its estate have remained in place and suggests that, whilst comps will become tougher, it will continue to perform for the remainder of the current financial year. This is reassuring and does mean that would-be investors may gradually be coming to see Enterprise Inns as once again an investible stock and, over time, its PER (only 7.9x this year falling to 7.3x next), will become more relevant that its debt pile.
“Debt appears to be manageable and is coming down. The group has yet to pay a dividend, however, and this may dissuade some observers from getting involved. Nonetheless, the group is performing well, it is a geared play on the performance of several billion pounds worth of improving assets and investors could (after several years of being repelled) be attracted by the group’s large amount of fixed rate debt in a period during which interest rates (and perhaps inflation) could rise.”
