Leading sector analyst Jamie Rollo has reduced his earnings-per-share forecast for Enterprise Inns by 5% to reflect “challenging” trading in Q2 but maintained his price target, predicting that like-for-like sales will stabilise in H2.
Jamie Rollo at Morgan Stanley reiterated his Overweight recommendation for the tenanted and leased pub company, which reports its H1 results on 14 May, saying that he sees the shares getting further rerated upwards as like-for-like income stabilises, debt levels become more manageable and the shares trade on a more normal valuation.
He said: “We expect Q2 trading to have remained challenging given the poor weather, and reduce our EPS forecasts by 5% to reflect this, but remain Overweight the shares.
“We forecast H1 EBITDA of £152m (-9%), PBT of £54m (-16%), and EPS of 8.1p (-15%). We forecast a 4% LFL net income drop in H1, which along with disposals and high financial leverage drives our sharp EPS drop.
“Trading in the first 17 weeks was disappointing (LfL net income -4.4%), partly due to the collapse of Waverley and impact of the snow (c-2.5% excluding these), and conditions have remained challenging due to the poor weather. As a result of this weak trading, we are reducing our FY EPS forecasts by 5%, but as we continue to expect more stable LFLs in H2, we are not changing our price target.
“We remain Overweight the shares as we see LFLs stabilising and think the debt levels are becoming more manageable, meaning the company deserves a more normal valuation.”
Rollo said he expects trading in the second quarter to have “remained challenging” but thinks current trading “could show more positive signs”.
“Like for like trends across the pub sector have been affected by the poor weather and tough comparables, and the leased pub sector continues to be challenged.
“Enterprise reported a 4.4% LFL net income decline for the first 17 weeks of its financial year, although this was c-2.5% underlying excluding the collapse of wholesaler Waverley (£1m to net income) and the snow impact (£1.5m). Trading in the industry was tough in February, with Spirit reporting LfL net income in its Leased estate -4.2% in the eight weeks to 2 March and Punch reporting -3.5% in the 12 weeks to 2 March, and March will also look poor due to the weather. As a result we expect trading for the remainder of H1 to have been -3%.”
He added: “Looking into H2, we assume a slight improvement to -1.5% LFLs, giving -3% for the FY, which is more conservative than the company’s expectation for H2 LFL income to have stabilised. The weather in April 2012 was poor and thus April and May 2013 should be a better indication of underlying trends.
“We are reducing our EPS forecasts by 5% to reflect weaker than expected H1 trading. We expect -4% LFLs in H1 and -1.5% in H2, implying a 9% EBITDA drop in H1 and 6% in H2.
“Overall, our FY LFL net income assumption moves from -1.5% to -3.0%, and this leads to a 2% EBITDA cut, and a 5% EPS cut given the low interest cover. We are not changing out 140p price target (7.5x implied P/E) as the stock market has moved significantly higher since we last set this, and the relative valuation discount is just as wide as it was.”
Rollo said he expected to see an update on progress with Enterprise’s disposals and balance sheet, “We forecast bank debt to drop by £160m this year to c.£150m, but will not fall much in H1 due to disposals being skewed to H2, and there tends to be a working capital increase in H1.
“Net debt:EBITDA remained high in 2012 at 8.1x, but the mix of debt is improving, with short-term bank debt falling sharply and refinanced, the PLC likely to upstream a dividend for the foreseeable future, and the next big maturity not until 2018 (£600m corporate bond).”
He added: “We think Enterprise could buy back up to half of its 2018 debt with FCF and refinance the rest as by then the securitised debt ND:EBITDA will be around 4x, and the risk of a credit event has been materially reduced. However, if LfLs remain negative, we think the company could consider raising a convertible bond.”
“LFL income in the tenanted pub industry has been rebased and is slowly stabilising, with Enterprise’s LFLs 14% below 2008, but only -1% in 2012 and we think underlying trends should improve from here after an unusually tough H1. Net debt:EBITDA has remained stubbornly high at c. 8x, but the mix of debt has improved.
“Enterprise is becoming a more normal company deserving a more normal valuation, and the current valuation looks low at 5x calendar 2013e P/E and 10% FCF yield.”
