Leading sector analyst Simon French has initiated his coverage of Young’s, the London-based pub group, with a Buy recommendation, while also upgrading rival Fuller’s to a Hold.
French, of Panmure Gordon, this morning said Young’s is re-emerging as a “major force” in the capital’s eating and drinking out market, and issued a 787p target price for the firm, implying a c.15% upside potential.
He highlighted the fact that c.87% of Young’s earnings come from managed pubs, mostly within the M25, a market that’s proved to be “particularly resilient” since 2008, while major events such as the Diamond Jubilee and the 2012 Olympics should augment this trend.
French also pointed to strong recent trading, with like-for-like sales in its managed estate up 5.4% and Geronimo up 6.8% in the seven weeks to 21 November. He predicted a “strong” Christmas, especially in comparison to last year’s weather-impacted comparatives.
He predicted a 12.3% compound annual growth rate in earnings per share over the next three years, compared to a predicted 5.6% rise for Fuller’s, and Young’s also has a superior yield of 2.1%.
And French estimated that the company’s year-end net asset value would be £316m, a c.5% premium on the current market cap of £300m.
“Young’s is re-emerging as a major force in the London eating and drinking out market. Geronimo appears an inspired acquisition, adding strong earnings growth and seemingly re-energising the Young’s managed estate,” said French.
“The current share price is underpinned by the NAV but double-digit earnings growth and scope for further M&A warrant a higher price, in our view.”
French increased his target price for Fuller’s from 545p to 735p, saying its acquisition strategy has partly addressed his concerns. The firm bought nine managed pubs and three tenanted pubs during FY2012E and increased bank facilities by £30m to £120m to support its “ongoing selective acquisition strategy”.
Although his FY 2012E PBT forecast remains unchanged at £29.9m, due to reduced tax rate guidance the earnings per share forecasts increases 4% to 39p. The FY 2013E forecast has increased c.1.6% to £31.5m PBT (41.8p EPS) to include an uplift from the new pubs.
French also estimates a 3.4% rise in like-for-like trading at its managed estate, and anticipates a stong Christams, with both volumes and spend “significantly higher” year-on-year.
He said: “H1 results helped justify the apparent premium the stock market places on London centric earnings underpinned by freehold property.
“Fuller’s freehold pub estate is of high quality but we forecast only 5.6% CAGR in EPS over the next three years compared to closest peer Young’s where we forecast 12.3% CAGR in EPS over the next three years. However we expect London to remain a resilient segment of the market and therefore the premium rating should remain intact.”
Meanwhile, this morning Paul Hickman of Peel Hunt also issued a Buy recommendation for Young's.
Hickman said: "Young’s trades in the best property market in the country, and is developing a strategy that is succeeding in increasing the value of its retail operation.
"The latest phase of this strategy was the acquisition of Geronimo Inns, which after this first half-year is working strongly. Although Young’s is at a premium level like its food and drink offer, we believe the prospects for share performance are bright."
