Paul Hickman, analyst at Peel Hunt, has downgraded Enterprise Inns from hold to sell with a price target of 75p.
He said: "Enterprise Inns does not announce a pre-close, but our review of the position ahead of the interims leads us to downgrade our expectations both for this and the full year.
"We are downgrading our FY2011E forecast by 6% on higher than expected lease costs following sale and leaseback transactions, the snow interruption in December, and additional depreciation.
"It was hoped at quarter one that the £2m snow effect would be recovered on better trading, but we do not now expect to see that. "Sale and leaseback transactions, averaging initial yield of 6.7%, are not enhancing against our FY2012E forecast blended rate of the same figure, and depreciation has increased slightly.
"Although we are downgrading FY2011E operating profit by only 3%, financial gearing turns this into a 6% downgrade, to profit before tax of £165m and earnings per share of 22.8p, an earnings decline of 12%.
"Our first half forecast is profit before tax £78m, earnings per share of 11.4p, an earnings decline of 9%.
"This leads us to re-examine our target price. EBITDA of £366m for the year, at a sub-sector average multiple of 8x (against 8.5x for the sector) implies EV of £2,932m, less forecast net debt of £2,924m, giving a negligible share price.
"Alternatively, tangible net asset value gives a higher result at 198p. However, we consider it prudent to expect a further 5% impairment charge, which reduces that to 149p.
"Hence we average out at 75p. "Enterprise’s gradualist strategy, of reducing debt and estate size while increasing quality, has left the share price in the wilderness for two years.
"Eventually, we expect the strategy to gain traction, with performance stabilising and debt reducing. But we are afraid that point has not yet been reached."
