Shepherd Neame shares are undervalued and the Kent-based brewer and pub operator represents a buying opportunity, according to a new note from Charles Stanley Securities.
Charles Stanley said: “We are forecasting FY2013 PBT normalised of £8.0m, EPS of 46.5p and a dividend of 25.0p putting the shares on a PER of 17.3x.
“The shares remain undervalued at a discount of 21% to reported net asset value of 970p. We reiterate our Buy recommendation and 1,200p target price based on a 20% discount the underlying net asset value of the group.”
The note called Shepherd Neame a “well managed integrated pubs, inns and hotels group” and highlighted the fact it was named Best Managed Pub Company (2-50 sites) at the Publican Awards 2013.
Charles Stanley described Shepherd Neame’s performance in the 26 weeks to 29 December, where revenues grew 2.6% to £69.2m and pre-tax profits were £4.5m, as “solid... given challenging market conditions”.
“Shepherd Neame is focused upon developing a high quality integrated beer and pub business. The key is that the group continues to develop a freehold estate of traditional pubs, inns and hotels within a concentrated area encompassing Kent, London and the South East of England.
“It also has a portfolio of premium ale, craft and world lagers. The group has also continued to invest in its brewing and logistics operational capacity. The material benefits of prior investment are shown in that following investment of £3.2m in the bottling line – increased capacity by 41%.”
Charles Stanley highlighted the company’s “enviable” track record of delivering profits and dividends to shareholders, with the net asset value rising from 663p in 2003 to 970p at the recent interims.
The company has also been “active in the management of its estate”, responding to fundamental changes in the marketplace, selling smaller wet-led tenanted pubs and reinvesting in higher-turnover outlets with more food and accommodation.
Shepherd Neame outperformed the overall beer market, the note said, and it has a strong regional presence.
The note was also positive on Shepherd Neame’s tenanted model. “Shepherd Neame operates a model based upon a predominately tenanted pub estate and without a lease agreement. Therefore the agreements offered to licensees are short term, nonassignable which means that the head office has greater flexibility over sites.
“Whilst the head office cannot force a tenant out of a particular pub, the length of time that a site can remain ‘poorly performing’ due to a weak operator
is reduced by such agreement terms.”
Charles Stanley added that Shepherd Neame “retains a strong balance sheet which gives it flexibility when considering acquisitions”.
“It has long term borrowing facilities which underpin its growth strategy. These currently amount to £95m compared to net debt of £75.8m at the period end. If you look at the net assets total of £201.5m (reflecting the revaluation in 2011), the gearing level is c39%, reflecting a conservative approach.
“As at the year ended June 2012 the ratio of net debt to EBITDA amounted to 3.8x at the period end which was impacted by acquisitions undertaken prior to the year end as well as previously. Without these developments the ratio would have been 3.1x. Shepherd Neame operates relatively modest debt levels compared to some groups in its sector.”
Charles Stanley forecasting FY2013 revenues of £137m and PBT normalised of £8m.
“The PER of 17.3x is modestly above its peers which are on an average of 15.5x. The shares are at an unwarranted discount of 21% to the reported net asset value of 970p. If the £68m surplus highlighted by the 2011 valuation is added the underlying NAV is significantly higher at 1500p. The shares have risen by 16% over the last year outperforming the FTSE All-Share by 2.6%.”
