Leading analyst Douglas Jack has said Spirit Pub Company’s shares are “arguably undervalued” following its Q3 update yesterday.
Reiterating his Buy recommendation for Spirit, Jack, of Numis, said he was holding his full year pre-tax profit forecast of £57.6m but said he expects the consensus (currently £56.2m) to rise.
Spirit yesterday reported a 6% rise in like-for-like sales in its managed estate in the 12 weeks to 24 May, with like-for-like net income in the leased arm accelerating to 5.3%.
Jack said: “Given the company’s momentum and upgrade risk, we would buy the shares at current, arguably undervalued, levels.
“In our view, the 7.7x EV/ebitda rating does not properly reflect Spirit’s management and brand quality, earnings growth (13% in H1), progressive dividend (up 6% in H1) and de-gearing (to 4.4x net debt/Ebitda this year).
“We believe volumes, prices and average spend are all in growth, with London and value food pubs continuing to outperform. Managed Ebitdar margins (up 30bps in H1) should be up. Food costs inflation should have slowed to under 2%, but this benefit should be offset by the start of the Carbon Levy (at a cost of £2m pa) in early H2.
“We expect total cost inflation to be a manageable 2-3%, net of mitigation.”
Regarding the performance of the leased business, Jack said: “April-May trading must have been very strong given that March LFL net income was flat due to changes in the supply network ordering process (in February). LFL net income was aided by investment, disposals, increased training and innovative agreements. After 40 weeks, LFL net income is up 3.6%.”
He added: “The pace of Flaming Grill conversions is accelerating, with 50 projects expected to be completed by spring 2015. These lower-capex investments should benefit cash returns, which already average 28%. Two new sites have been acquired, with further pubs likely to emerge from the Orchid estate.
“We are holding our forecasts, which assume 3.3% managed LFL sales and 2.1% leased LFL net income. These forecasts allow for tough LFL sales comps in Q4 (Q1-3: 0.7%/Q4: 4.1%). We believe we are being cautious, but it is important to remember that one third of Spirit’s annual PBT is usually generated in Q4.”
