A leading analyst has forecast that Spirit Pub Company will report a weak H1 when it updates the market on 25 April, with 2% EBIT growth and expects mixed current trading given the poor weather in March but easier comps in April.
Jamie Rollo at Morgan Stanley said: “We forecast revenues of £397m (+1%) EBIT of £51m (+1%), PBT of £21m (+6%), and EPS of 2.4p (+8%). We also expect 3% growth in the interim dividend to 0.67p. The first half faced tough comparables and poor weather and we expect things to improve in the second half of the year, though Spirit will need a noticeable improvement given our FY forecast implies 14% growth in H2 PBT.
“At the Q2 trading update, Spirit announced it will combine its community and high street pubs under a new Locals division run by its Leased division’s management and we will look for further details here. We are Underweight the shares as we are concerned about Spirit’s weak FCF generation, rigid debt structure, and poor Leased pub performance, and we expect LfL sales to slow once capex levels normalise.”
In terms of its managed pubs, Spirit reported a significant slowdown within its Managed estate in Q2 with LfL sales for the 8 weeks to 2 March at -1.1% compared to +2.3% in the first 20 weeks and +4.8% in 2012.
Rollo: “Spirit said that trading conditions were very challenging due to the poor weather but that it outperformed the market, though the gap has been narrowing. Trading comparables should get easier from here due to the poor weather in H2 last year, though comps are not that weak at +3.9% Managed LfLs in H2 2012. March trading is likely to have been very poor given the cold weather, but comps are much easier in April. Spirit needs +6.2% LfL sales in H2 to reach our full year estimate of +3.8% Managed LfL sales and we see some downside risk here.
“For H1 we estimate Managed revenues +2% to £354m and EBIT of £33m (+8%), a 50bps margin increase. Spirit completed 50 refurbishments in the first 28 weeks of the year and said it is still planning 80 more this year.”
For the group’s leased division LfL net income was -4.2% for the 8-week period to 2 March, a slowdown from the -2.9% for the first 20 weeks of the year and reversing a couple of quarters of sequential improvement.
Rollo: “Spirit said that the period was negatively impacted by the weather, but the deterioration is still worrying given it passed the anniversary of the rent reviews in Q2. The company continues to guide to flat LfL net income by the end of the year and we currently forecast -2.2% LfL net income for 2013, implying an improvement to -1.5% in H2.
“Spirit had completed 38 investments as part of its alternative operating model trial at its Q2 update and said that signs are encouraging so far. We will look for more details here, as well as any plans to convert some of the new Locals division pubs across to Leased. For H1 we estimate Leased revenues of £43m (-7%) and EBIT of £18m (-8%), leading to a 60bps margin contraction.
“For 2013, we forecast LfL sales growth in Managed of 3.8% and -2.2% LfL net income in Leased. Our forecasts are broadly in line with consensus at £56.6m PBT versus £56.3m (6.4p EPS). After a H1 performance showing +1.4% LfL sales in Managed and -2.9% LfL net income in Leased, the company needs to generate LfL sales of c. +6% in Managed and -1.5% in Leased in H2. The company said the weather had a big impact on its H2 performance last year, so as long as its assessment of this is correct, it should just be able to deliver these forecasts.”
Rollo said that his Underweight stance, reflected several factors.
He said: “First, FCF at the PLC level is negative as the small upstreamed dividend from the securitised debt vehicle is insufficient to pay PLC cash demands of the loss-making onerous leases, pension costs, some capex, and the ordinary dividend.
“Second, while the Managed pubs offer catch-up potential to M&B trading levels, average unit sales and margins have always been lower for structural reasons, and the impressive sales growth rates will likely slow as the investment programme winds down.
“Third, the performance of its Leased pubs (c.35% of EBIT) has been disappointing, even without the rent reviews, and while we think Spirit’s plans to sell some of these make sense, we forecast this will be quite dilutive. Finally, the shares look fully valued on 8.8x 2013e P/E and 8.7x EBITDA, rising to 9.9x and 9.5x respectively adjusting for the operating lease provision.”
