A leading analyst has said that Spirit, which will report its full-year trading update on 4 September, should generate the strongest earnings growth in the licensed retail sector in 2013E, with a potential for self-help that is undervalued.
Douglas Jack at Numis said: “Since Spirit last reported (up to 26 May), trading conditions have been mixed, but we believe there should be sufficient margin of safety for forecasts to be left unchanged.
“We believe Spirit will carry plenty of growth momentum in 2013E, which could be augmented by the company: starting to expand; and franchising part of the leased estate, potentially bringing additional upside from extending the new management system roll out. Despite the initiation of dividends and PBT being forecast to grow 23%, we expect debt to fall in H2 2012E. We would buy the shares, valued at just 9.7x P/E and 7.1x EV/EBITDA.”
Jack said that since Spirit last gave an update on 26 May, consensus forecasts have fallen 2%, “possibly reflecting weaker high street footfall, limited benefit from the Olympics and, most of all, a 62% YOY increase in rainfall in June/July”.
He said: “However, against poor weather and a comp of 7.3% (the Royal Wedding was in Q3 last year), managed pub LFL sales rose 3.7% in Q3. The Diamond Jubilee, Euro 2012 and an easier comparative of 3.8% should benefit Q4.
“Our consensus-in-line full-year forecast assumes managed LFL sales rise 3.3% (vs. 5.0% in Q1-3) and EBITDAR margins rise 130bps (vs. 140bps in H1). Both metrics have benefited from the 80%-complete rebranding programme and both should benefit from no major refurbishment downtime in Q4 (vs. 60 major projects in Q4 2011). This, slowing cost pressure (from 5% pre-mitigation) and the roll out of new management systems (34%-complete as at Q3) should maintain margin momentum into 2013E.”
Jack said that the across the group’s c500-strong leased estate LFL net income was down 5.3% in Q1-3 (vs. the analyst’s -4.5% full year forecast).
He said: “We expect Q4 to benefit from minimal rent-review activity, a strong events calendar, falling discounts and concessions, utilisation of managed pub disciplines, and a step up in tail-end disposal activity in H2 (reducing the non-substantive estate to under 10% of leased pubs, from 16%).”
