A leading analyst has said that he expects poor weather and challenging comps to have depressed trading at Spirit, and remained worried about the performance of its c530-leased estate.
Jamie Rollo at Morgan Stanley said: “We expect poor weather to have weighed on trading in both the leased and managed estates, and note that comps were boosted by the impact of the Royal Wedding and good weather last April.
“We think there is a risk that management has focused too much on the managed estate to the detriment of the leased business, and the company mentioned during H1 results that its focus was on stabilising trading going forward. The H1 like-for-like net income decline of -4.5% implies that Spirit needs growth of +1% in the second half to hit our full year estimate of -2%, and we expect broadly flat like-for-like net income in Q3. Around 40% of Spirit’s EBIT and almost 100% of FCF is generated
from its portfolio of 530 leased pubs.”
Rollo said that for H2, he expected revenue of £368m (+3%), EBITDA of £76.4m (+7%), PBT of £30.9m (+31%), EPS of 3.46p (+36%), and DPS of 1.3p. He forecast L4L sales in managed of +4%, and -2% L4L net income in leased.
He said: “We are broadly in line with consensus for the full year, but with Spirit needing over 30% PBT growth in H2 (versus -5% in H1) to make our forecasts, we see some forecast risk. We remain Underweight the shares as we are worried about Spirit’s weak FCF generation, debt structure, and think L4L sales will slow sharply once capex levels normalise.”
“Our Underweight on Spirit’s shares reflects several factors. First, FCF is low due to high capex levels, high debt levels, and some loss-making leased pubs, and the PLC cash is being drained without a chunky upstreamed dividend from the securitised debt vehicle in which all the profitable pubs reside.
“Second, while the managed pubs offer catch-up potential to M&B trading levels, average unit sales and margins have always been lower than MAB for structural reasons, and we think L4L sales will slow as capex levels normalise in 2014. Third, the Leased pubs (c 40% of
EBIT) are trading poorly, and while Spirit’s plans to sell most of these makes sense, it will be heavily dilutive, we forecast.
“Finally, EPS drops by around 15% if we do not give Spirit the benefit of its lease provision. The shares have had a good run with the rest of the pub sector, and adjusting for the OLP provision are trading on 11.4x 2012 P/E and 9.7x EBITDA, which looks up with events to us.”
