Leading analyst Douglas Jack has predicted “strong” results for Spirit at its Q3 interim management statement next Tuesday, saying that trading for the pub group should be ahead.
Jack, of Numis, who issued a Buy recommendation at a Target Price of 110p, said: “We expect Spirit’s Q3 IMS, covering the 12 weeks to 24 May, to be strong aided by like-for-like sales growing 8.3% in March. As a result, full year forecasts (£57.6m PBT; consensus £56.2m) should be at least held, in our view. These assume 2.5% managed like-for-like sales and 0.4% leased like-for-like net income.”
He said Q3 like-for-like sales would have benefited from an easier comparatives of -0.6% (six weeks at -3.8%, followed by six weeks at 2.6%). “Overall, we expect Q3 and year-to-date like-for-like sales to be c.5%.”
“Managed EBITDAR margins (+30bps in H1) should be up. Volumes, prices and average spend have all been growing. In H1, cost inflation was 2%, net of mitigation measures (such as rolling out LED lighting), despite higher utility costs and business rates. In H2, food and labour inflation should still be c.2%, but the Carbon Levy has started, at a cost of £2m pa (£1m in H2).
“Leased like-for-like net income rose 2.6% in H1 and was flat in March, aided by investment, disposals and innovative agreements. After excluding changes in the supply network ordering process in Q2, underlying like-for-like net income was up 2.2% in H1 and up 2.6% in March (+2.3% after 32 weeks).
“Average cash returns have risen to 28% from 26%, aided by lower capex on Flaming Grill conversions, of which another 50 are expected by spring 2015. This process should be supplemented by Spirit gaining c20 trading sites (which are profitable overall) from Orchid. These sites should be rebranded as Flaming Grill and Fayre & Square and benefit from Spirit’s superior infrastructure and cost structure.
“Spirit’s trading should be ahead, allowing for tough comps in Q4. In our view, the 7.6.x 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).”
