Leading analysts Simon French and Douglas Jack has reiterated their Buy recommendations for Spirit following its Q4 trading update on Thursday.
French, of Panmure Gordon, said its trading was “broadly in line with our expectations”, with managed like-for-likes up 4.1% against forecasts of 4.5%, whilst net income in Leased fell 0.4%, against a broadly flat forecast.
French said: “Given the double-digit forecast earnings growth underpinned by self-help measures, improving returns, and attractive yield of 3.2% we think the shares warrant a re-rating. We therefore reiterate our Buy recommendation and 110p Target Price, implying c46% potential upside.
“The group has started FY 2014E with encouraging momentum and with consumer confidence at a near four-year high. Priorities for the year ahead include completing the refurbishment programme in Managed pubs, continuing to evolve the right level of control in its Leased estate and ensure FCF generation is strong enough to meet the amortisation schedule of the fixed rate notes beginning in March 2014 whilst preserving the progressive dividend policy.
“The group expects that FY 2013E results will be in line with market expectations of £56.1m PBT (6.4p EPS). Our forecast is exactly in line with consensus. For FY 2014E consensus expectations are for £60.1m PBT (7.0p EPS) and we are slightly more optimistic than consensus on £60.9m PBT (7.1p EPS).”
Jack of Numis also said Spirit’s trading was in line with expectations. “Encouragingly, managed LFL sales have been driven by food (up 4.7% in Q4 vs drink’s 2.8%). This, combined with easy comps, suggests that recent momentum should continue.”
“We are holding our 2013E forecast as a result of Q4 trading meeting expectations. We believe the risk to our 2014E forecasts (£58.0m PBT; consensus £59.8m) is on the upside; we assume just 1.7% managed LFL sales and -0.9% leased LFL net income.
“Despite this upside and c£80m of cash tax credits, Spirit has the lowest valuation in its sub-sector on most metrics. We believe this reflects the onerous lease provision, a past slowdown in LFL sales and aggressive bond amortisation. As these issues are resolved, the rating should improve accordingly, in our view.”
