Leading analyst Douglas Jack has reduced his Target Price for Enterprise Inns to 125p and “advised caution” on the business.
He issued a Hold recommendation ahead of Enterprise’s Q3 interim management statement on 7 August.
“We forecast LFL net income being up 1% in Q3 and flat in Q4. The company is making gradual progress in many areas, but beer volumes are continuing to fall sharply in the wet-led pub segment and weather-comps in Q4 will be tough. Given this and a regulatory overhang, we advise caution.
“LFL net income rose 1.1% in H1 aided by: easy comps of -4.2%; more growth-orientated investment (at 32% of capex); strong trading in 180 Beacon “managed tenanted” pubs; and, to a small extent, increasing central purchasing (in H1, the ratio of publicans buying centrally was: 13% for Sky tv; 24% for Arqiva WiFi; and 6% for Brakes’ food).
“LFL net income should be positive in Q3, having been up during the first six weeks. Subsequently, the World Cup should have helped slightly, given that 59% of Enterprise’s estate is residential wet-led (source: CGA). Q3’s weather was good, similar to Q3 2013, but weather comps will be tough in Q4 and wet-led sector volumes continue to fall.”
“One hundred and twenty nine pubs were sold for £42m in H1, with over 200 pubs expected to be sold this year, for a targeted £70m of proceeds. We forecast a 5% reduction in net debt this year versus a 3% decline in EBITDA, enabling net debt/EBITDA to start falling (by 0.2x) from 8.1x. Bank debt, at £76m, should be paid off over the next two years.”
Jack also highlighted the political risk.
“It is good that the Statutory Code does not include a mandatory ‘free-of-tie option with open market rent review’. However, this option, which could have potentially large negative consequences, is favoured by Labour and the Liberal Democrats.
“We expect to hold our full year PBT forecast (£121m; consensus £120m), which anticipates 0.7% LFL net income growth. Although debt is starting to fall more quickly than EBITDA, wet-led market trends, political risk and low tenanted portfolio disposal multiples (6-7x EV/EBITDA) justify caution, in our view. We are reducing our target price to 125p, equating to 9.7x 2015E EV/EBITDA (Punch Taverns: 9.5x).”
