Spirit Pub Company is well placed to maintain its year-on-year growth, despite its relatively high leverage and chequered history, according to a leading analyst. In a note entitled “Unshackled and positioned for growth”, Greg Feehely at Altium Securities, said that the potential upside for Spirit’s turnaround story outweighs these concerns. He said: “Spirit is well placed to maintain its c.4% year-on-year sales growth, despite the economic backdrop, while expanding its operating margin by one percentage point to 15% by FY14E, bringing it more in line with its peers. With much of the risk already factored in, all three of our scenarios imply a minimum upside of 14%.” However, Feehely said the road to recovery was not without its challenges. He said: “Before Spirit is able to return to a position of strength, it needs to: manage it capital structure effectively as it is one of the highest leveraged pub companies within the sector; weather the lacklustre UK economy and falling household income; and prevail over the increased competition for each consumer pound spent.” Feehely said that initial results from the group’s aggressive capital expenditure programme “are encouraging” and that through its renewed focus on food-led sales, it was well positioned to take advantage of the growing eating-out market, due to its “enviable geographical positioning and price conscious offerings”. Regarding its leased estate, Feehely said it could raise up to £275m from a successful sale of the portfolio. He said: “In our bull case, we envisage a scenario in which Spirit successfully disposes of its remaining leased pubs in FY2014E for c.£275m and uses the proceeds to lower its FY2014E total net debt/Ebitda ratio from 5.1x to 3.8x.” The analyst, who rates the company’s shares as a Buy, said that based on his sum-of-the-parts analysis, Spirit is currently trading at a c.25% discount to Altium’s initial target price of 66p and a c.35% discount to its bull case target price of 75p. He said: “Whilst we do not believe Spirit should trade at a premium to its closest peers, we see the current share price as too materially discounted given Spirit’s superior EPS CAGR of 16.4% (FY12-15E) (Greene King: 3.5%). Thus, through string revenue growth and margin expansion Spirit should be able to close this gap and trade at a more favourable multiple.”