A leading analyst has said that the half-year results due from Enterprise Inns next week (15 May) should emphasise estate/operational improvements and point towards financial stability at the leased pub operator.
Douglas Jack at Numis said: “Tuesday’s H1 results, for which we are forecasting PBT to be down 6.6% to £69.1m (consensus £68.6m), should emphasise estate/operational improvements (to enable like-for-like net income to stabilise), debt reduction and progress on efforts to stop the Unique bond entering cash trap in 2014E. Here, success should point towards financial stability, which is why our stance remains Buy and our target price is increasing to 100p, from 60p.”
Jack said that the forecast fall in PBT was based on expecting the average number of pubs to be down almost 6% and EBITDA/outlet to fall 1.6% (but growing c.1% excluding the impact of sale and leasebacks).
He said: “Average net income improved to 5% in Q1 from 2011’s 0.9% (LFL net income improved to less than -2%, from -4%) excluding the impact of sale and leasebacks. This reflected investment, tail-end disposals, favourable LFL conditions and the rate of non-contractual support costs halving to £7.5m pa. However, average net income should have weakened in Q2 due to tough LFL conditions and the disposal of top-end pubs to assist the pay-down of bank debt.”
The analyst forecast disposal proceeds to be £175m this year (including sale and leasebacks).
He said: “Of this, at least £73m should have occurred in H1, resulting in bank debt falling to c.£360m from £446m. The company should pay off its Tranche B bank debt and A2N notes ahead of schedule. The key issue at these results is whether it can show that it can repay some of the A3/A4 notes early to prevent the Unique bond from being cash trapped and requiring an estimated £37m of EBITDA support in 2014E.”
Jack said that sources of optimism were: improving operational support; and 30% average net income uplifts in 110 Beacon “managed tenancy” sites, with 300 sites targeted by 30 September.
He said: “Our revised 100p target price equates to 9.5x EV/EBITDA rating, in line with the company’s average valuation in 2009 and 2010, before the market’s financial concerns peaked. In our view, if the company can demonstrate that the Unique bond can avoid cash trap, the shares should bounce to this level (100p) where the equity free cash flow yield would be 22% (or 8% post 2014E debt amortisation).”
