M&C Report takes a closer look at the full-year results for the year to 30 September 2011 from Enterprise Inns, the leased and tenanted pub operator:

Project Beacon and franchises
The number of pubs in the Project Beacon managed tenancy concept could reach 600, said Tuppen. “We are looking to have 500 to 600 of these in place so it’s very much a permanent addition to the estate,” he told analysts. Enterprise plans to convert 300 more pubs to the concept in the coming year; 90 pubs have trialled the concept, which sees Enterprise take stricter management controls including decisions relating to products available for sale, retail pricing, retail standards and marketing. Sales volumes increased by 40% in the trial sites, “albeit at lower wholesale margins”. Tuppen said profits also grew for the licensees and the pubco. Average investment in the sites is £25,000, with returns on investment of around 20%; the usual expected figure is around 12%. There are “marginal” extra costs in terms of employing extra regional managers, Tuppen said. “We’ve discovered that in certain sorts of pubs in more wet-led price conscious areas we can have real impact on performance.” Chief operating officer Simon Townsend said that going forward, the company would look for “more flexible templates that will cater for a wider variety of customers.” Tuppen added: “It has given us an insight into obvious ability to develop some pubs to franchise, which in the end is getting close to running a managed estate. We do have over 500 pubs in the estate currently run as managed houses by other people, and over 700 pubs where turnover is more than £10,0000 per week. Those are good metrics, demonstrating the quality of our estate.” Tuppen said saw the franchise concept as a way to manoeuvre more into food-led sites. No further details of the franchise plan are currently available, although Tuppen said he expects trials to run this year.

Disposals
“I’m not suggesting we’re going to be selling the crown jewels,” said Tuppen, in reference to plan to sell off c.100 pubs following a review of its estate that is currently underway. However, he said the company has a “responsibility” to sell its best pubs if the money offered makes it worthwhile. He gives the example of a pub earning £900k for which someone will offer £3m. “That may have been deemed to be a crown jewel in the estate but I would have thought that if you’re getting a decent price for the diamond, it’s worth doing it.” The review aims to ensure income potential is maximised for each site, “either as a pub or, where appropriate through change of use or disposal at prices ahead of current book value”. Around £100m of the £150m expected to be raised from the disposal programme could come through those sites identified in the review; the remaining £50m is expected to come from trimming the tail. Tuppen said the plan to return to “normal” disposal rates of 150-200 sites per year still holds for the current year - the company has been selling around 500 per annum, with 466 sold during the year, generating net proceeds of £106m.

New chairman
Today’s announcement that chairman of 15 years Hubert Reid is to retire has fuelled speculation that Tuppen is being lined up to succeed him. But the chief executive distanced himself from the role. “The search for a replacement is now underway. If it was my intention to step up they would hardly need a search,” he said.

Debt
Chief financial officer Neil Smith said the company plans to refinance its debt facility in the coming year, earlier than expected, due to increasing concerns about the risk of refinancing due to the volatility of the banking sector. Bank debt at the year end was £464m (2010: £686m), with overall group debt down from £3,305m to £3,003m. The new £625m forward debt facility included £419m in tranche A (expiring December 2013) and £206m in tranche B (expiring December 2012). To date, £80m of tranche B has been cancelled, providing a total debt facility at the year end of £545m.

Trading variations
While FY income was flat among Enterprise’s 2,432 pubs in the south, at £181m, income fell 1% in the central region (1,520 pubs, £102m) and it dipped 5% in the north (1,737 pubs, £118m). While overall income in its 5,689 pubs on substantive agreements fell 2% to £401m, the remaining 600 on non-substantive agreements fell 38% to £20m. Of the 600, 80% are either closed or operating under temporary agreements pending investments and/or recruitment of a more permanent licensee; the remainder are likely to be sold in the coming year, the firm said.

Financial assistance
Enterprise provided £15m of direct financial help during the year. The amount peaked in H1, following a period of severe weather and the January VAT increase. The amount fell during H2, Enterprise said, and the current annualised figure stands at £8m. Meanwhile, the underlying cost of bad debt in the year reduced from £2.1m to £1.5m, with the level of overdue balances also down to £5m (2010: £6.1m). Enterprise also revealed that of the 976 tenants and lessees on substantive agreements who have been in their pubs for less than one year, 60% pay stepped rents and receive other concessions.

Ale
Cask ale now represents 18% of all sales by volume. In total 1,457 brands from 408 brewers are sold; this includes 388 members of the Society of Independent Brewers (SIBA) via its direct delivery scheme. Three quarters of Enterprise pubs currently offer cask ale.

Recruitment
Enterprise continues to receive more than 50 enquires per week from “good quality publicans” who want to take an agreement. In addition, the company’s updated code of practice has now been “acknowledged” by 97% of licensees on substantive agreements.

Tenant support packages
Enterprise outlined the level of take up of some support package. The Buying Group, giving access to items such as food and utilities, was used by 4,149 tenants, saving them £4m, while the Safety Management Solution heath and safety audit package has been taken up by 3,382 licensees. Overall 6,020 training days were provided encompassing areas such as social networking and media marketing skills.

Government response to the Business, Innovation & Skills Committee (BISC)
The Department for Business, Innovation & Skills is due to release its response to the damning BISC report this week. Among other things, the report called for a statutory code of practice to govern pubcos’ treatment of tenants, along with a code adjudicator. Tuppen, who earlier this month labelled BISC’s investigation a “political pantomime”, said: “The most important thing is the industry does not need any statutory interference. The industry has demonstrated its ability to self regulate.”

Analysts

Geof Collyer of Deutsche Bank issued a Hold recommendation and said it was a “relatively upbeat statement with signs that positive returns should be back on the cards in the near future”.

“We reiterate our view from our recent note that the group has a sound and solvent future. It continues to repay debt at a faster pace than the assets write-downs, so improving the loan-to-value ratio, which stood at 65% at the year end.”

Collyer said he downgraded forecasts due to the £150m disposal target, but the price target for Enterprise (105p) has been retained because the capital structure is being adjusted in favour of the equity base.

Simon French at Panmure Gordon retained his Buy recommendation at a target price of 80p. He called the decision to write down the value of its pub estate by 4% “a prudent move”.

French added: “The stock offers significant upside potential, in our view, as it demonstrates it can service its debt profile and the equity component of the EV increases substantially.”

A note from Barclays Capital said there were some “encouraging signs” in the results, such the 2% average income per pub rise in H2 2011 against 0% in H1.

It also welcomed the £150m disposal programme. “Although this could be interpreted as a sign of ongoing weak trading, we view this announcement positively as it demonstrates that the company is focusing on reducing financial risks. Debt/ebitda is still elevated at 7.9x in FY12E (8.1x in FY11), but the short-term bank debt should fall significantly from £464m in FY11 to £276m in FY12, helping remove refinancing risk.”

But the note added: “Despite these encouraging signs, trading is clearly still very tough. The estate has been impaired by another 4%, and we have made small downgrades to our forecasts again (FY12E PBT cut by 1% to £146m). This leaves our FY12 PBT forecasts c7% below consensus although these changes mainly reflect the accelerated disposal initiative and subsequent loss in ebitda, rather than an expectation of a further deterioration in trading.”