Leading analyst Geof Collyer at Deutsche Bank said that he sees most of the issues surrounding the Enterprise Inns (ETI) share price beginning and ending with stabilising the trading position. He said: “This will come from (i) reducing the number of bottom-end pubs that are a drag on the performance of the rest of the estate; and (ii) improving lfl net income from the current negative position to at least ‘flat’. From a position of stable profits, ETI can grow its earnings, since it generates around £90m of organic free cash flow each year, after paying all bills and funding maintenance capex spend on the estate. Progress was made in H1 on lfl net income in the total estate moving from - 5% last year to -1.6%. At the nine-month stage, this run-rate had further improved to - 1.2%, implying Q3 was down by just over -0.5%. “The group is getting closer. There are several reasons for the improvement in underlying trading. (i) Management is being able to focus on the core business as opposed spending so much time fire-fighting the bottom-end sites, which the disposal programme has now reduced to sub 10% of the estate. (ii) Business failures are no worse and being offset by re-letting of pubs, which is helping to improve the overall quality of licensees. (iii) Due to state of the economy, although licensee support is the same as H1, more of it is being baked into the underlying contracts thereby providing a better cost base for licensees going forward.” Collyer said that following the significant disposal programmes of the past five years, he sees the bulk of the tenanted pubs owned by the group as “economically challenged not structurally flawed”. He said: “At the year end, the group will have sold around 30% of the peak level estate (end of 2005) leaving it with just over 6,000 pubs that will generally have all been part the estate for each of the past five years. It will greatly help the market’s perception of the progression towards improving profitability if the group could show in the final results in November the KPIs for the whole estate over this period.” Collyer also asked the question; when will the disposals programme stop being dilutive? He said: “Disposals at £148m are on track for management’s (and our) target of £200m for the year, with £98m of top end sites sold for over 14x EBITDA, which makes this part of the disposal programme broadly neutral in earnings terms, unlike so much of the disposals over the past few years. Next year should see the end of the exceptional asset disposals programme.” He said that this plan had enabled the group to reduce its bank debt to a point where it has been able to take out a new forward start facility that runs until June 2016. He said: “By this time, the group’s bank debt should be close to a point where it should be more or less equivalent to the level of an unsecured working capital and general purposes facility.” Will the plan to avoid cash trap for Unique in 2014 work? Collyer said: In our note (“Debt issues fading; reconnecting to the equity story” 30 April) we discussed the management plan to work through a solution to prevent its Unique securitisation falling into cash trap in 2014, thereby restricting the upstreaming of cash to the plc. This plan entailed buying in around £74m worth of the A3 & A4 Unique bonds by end September 2013. “At the end of Q3’12, the group had purchased and cancelled £41m, leaving only £33m of bonds to be acquired in the open market over the next five quarters. This equates to less than 4% of the par value of the A3 & A4 notes and just over 10% of the annual volume traded. There is plenty of time, but we feel the market would rather tick this factor off its list of outstanding issues sooner rather than later.” Will disposals bring down the debt? Collyer asks whether is there enough cash coming out to fulfil the debt paydown requirements? He said: “We estimate that by the end of FY’13 the bank debt could be down to within £10m of the remaining £150m facility that runs till June 2016. This would leave the group with scope to either pay off most of the remainder of bank debt entirely before it falls due, or start buying in the 2018 corporate bonds to reduce the repayment requirements. Either way, the level of debt pay-down by the end of FY’13 could be almost double the current market capitalisation.” Collyer recommended a target price of 105p for ETI, based on 10x FY’13E EBITA. He said: “The key upside risk is an earlier than expected return to like-for-like profits growth. Downside risks to our Hold stance and price target are (i) a major change to the market's perception of acceptable leverage; (ii) an inability to generate enough free cash flow to fund the amortisation programme; (iii) a worse-than-expected impact from the smoking ban and the deteriorating economy; and (iv) a change of view on the part of the group's banking syndicate regarding future levels of leverage.”