M&C Report takes a closer look at the full-year results to 17 August for Spirit Pub Company. We report from Spirit’s presentation to analysts featuring chief executive Mike Tye and finance director Paddy Gallagher, and speak to Tye.
Expansion
Spirit is looking to secure freeholds that are suitable for Fayre & Square or Flaming Grill, with expansion set to begin in the second quarter. “We believe there are a lot of pubs in the UK that are not being optimised at the moment,” Tye told M&C Report, adding that he believed Spirit’s “magic dust” could get “good results”. Newbuilds are not on the agenda for the time being. Tye added: “Don’t expect huge numbers [of acquisitions] in FY13. In future years I think you will see that accelerate.” Spirit re-stated its ambition to grow to 1,500 sites and Tye said he believed each brand could have 200 outlets without risking canibalisation. Gallagher said 20% returns on investment are sought.
Wacky Warehouse
Tye described the concept, which currenlty operates in c75 outlets, as a “phenomenal brand”. “It’s the best known kids play ground there is. There’s no reason why the majority of Fayre & Square can’t have some sort of Wacky.” Four new Wacky Warehouses were built in the year.
Chef & Brewer
Tye told M&C Report that a trial is underway of a version of Chef & Brewer that’s “slightly premium to what we are doing now”, with a “slightly better menu” and “better food quality”. The typical cost of changing the brand to its more premium format is c£30,000 to £40,000 each. A new menu is currently being rolled out across Chef & Brewer. He explained that the brand started out as “something quite premium” but moved to being more mid-market. Tye said the market is polarising and the middle ground is “probably the most difficult place to trade and it can become very crowded as people squeeze into the middle”.
Premium Pub & Dining
Two sites have been converted to the format so far, the George in Belsize Park at the Cricketers in Kew Green, and Tye said they are “performing very well”. He said that there are a “number of pubs” currently branded Chef & Brewer and Taylor Walker that could suit the format. Asked if he knew how many sites would suit Premium Pub & Dining, Tye said: “I don’t yet.” But he added: “We wouldn’t do it unless we thought there was a meaningful number.”
Flaming Grill, John Barras and Taylor Walker
A “light” version of Flaming Grill was trialled in H2, with conversions from some John Barras sites, and Gallagher said: “early pilot results are very encouraging”. These outlets require roughly 50% of the investment of a full Flaming Grill. Overall around 40 John Barras pubs could become other brands, and the company has hired an innovation manager for Barras. Spirit also converted five more pubs to its Taylor Walker brand in Durham, Birmingham, York, Newcastle and Colchester.
Managed: investments
Spirit completed 85 refurbishments in the year at an average cost of £142,000, significantly lower than in prior years, “which reflects the brand mix, smaller average footprint of the pubs and efficiencies achieved.”
“The proportion of our estate invested and branded is now 86% and we continue to achieve an average return on investment in excess of 25%.”
Paddy said he expected there to be between 45 and 50 large projects in the current year, plus up to 100 “sparkles”.
Managed: food
Food sales now account for 44% of managed sales.
Harry Ramsden’s
The fish & chip shop chain is looking to expand via a tie-in with a major pub company. When asked by M&C Report if Spirit would be interested in such a partnership, Tye said there are “no plans from my point of view”. He called Harry Ramsden’s a “good brand”.
Leased: innovation
Trials of innovative business models are due to be extended from the current 15 to another 20 this year, Tye told M&C Report. Of the 15 completed so far, 11 are from the franchise model (seven branded, four unbranded) and four others are co-investments. “This is a co-investment and shared income, which means that as the pubs move more and more to food and away from beer we don’t lose the income that the old traditional dry and wet rent tends to favour,” said Tye. “The world is moving on and the lease model has to evolve along with it. We will continue to flex the portfolio as the market evolves.”
Leased: investments
Spirit invested £11m in 105 pubs during the year, with returns in excess of its 25% hurdle. It spent a further £2m in iDraught.
Leased: disposals
Spirit disposed of 38 pubs in the year, raising proceeds of £8m and achieving a sale multiple of 8x historic EBITDA. The company has now sold 90 since taking full control of the estate and it expects only a handful to be sold in 2013/2014. Of those 6% of Leased pubs not on substantive agreements (2012: 9%), one third are on the market. Meanwhile, c40% of its closed units have been sublet.
Leased: performance
Like for like net income in the Leased business fell 2.1% in the year but Spirit highlighted an improving trend, with a decline of just 0.4% in Q4. “The improvement is also reflected in the like for like turnover of the business ,which was down just 0.4% for the full year and up 2.2% in the fourth quarter.” EBITDA for the Leased business declined £5m to £33m, which Spirit said was driven primarily by £3m of lost EBITDA through disposals and a £1m increase in allocated support costs resulting from the first full year of having the estate under our control following the end of the Management Services Agreement with Punch in March 2012. Like-for-like EBITDA on the pubs remaining in the estate at the year end was down 2.1% for the full year and returned to growth of 1% in Q4.
Capex
Capex was £53m, with £34m invested in the managed estate, £13m in Leased and £3m in infrastructure projects. Spirit also spent £3m purchasing the freeholds of two of our existing leasehold managed pubs: the Talbot in Bristol and the Red Lion in Moorgate, London.
“Focus for 2013/14 will be on a continuation of our innovation trials in both estates alongside our managed refresh programme. We therefore expect capital expenditure, excluding pub acquisitions, to be between £40m and £45m which represents the ongoing cost of evolving our brands and offers whilst maintaining our estate and infrastructure in excellent condition.”
Refinancing
Spirit this morning announced a proposal for its bondholders to tender their existing A1 and A3 bonds, which will be settled by the issue of new A6 and A7 bonds respectively, which will have a slightly higher coupon. The company is targeting participating levels of 705 for A1 bondholders and 50% for A3 and the proposal will remain open until 5pm on 1 November. Tye told M&C Report he was “confident” the targets would be met in the time period. “We set realistic targets,” Tye said. “I think the reaction will be strong.”
Current trading and outlook
Spirit said its managed estate made a “solid start” to the new financial year, with like-for-like sales up 4% in the first eight weeks. Its Leased estate has started the year “in line with expectations” with like-for-like net turnover up 1.2% in the first eight weeks and like-for-like net income down 0.3%.
The company said: “Although we saw some tentative signs of recovery towards the end of the financial year, we expect the consumer environment to remain challenging. General cost pressures are easing slightly, helped by the scrapping of the beer duty escalator and a sensible increase in the national minimum wage.
“Utilities, however, remain a significant cost headwind and this year will be exacerbated by the impact of the CRC Energy Efficiency scheme for which Spirit becomes liable for the first time in 2013/14.
“Despite these challenges we believe that the continuation of our strategy to deliver hospitality excellence to our guests will allow us to make further progress in the year ahead.”
People
Spirit said that this year it has embarked on a number of leadership development programmes, increased its training offer and revamped its career pathways. “Early results are encouraging with significant improvements seen in leadership scores in our engagement survey, behavioural scores in personal development reviews and the quality of development plans.”
The firm said it has seen significantly more internal promotions and lower management turnover than in previous years
Every Spirit pub has a hospitality trainer responsible for delivering training sessions.
In the Leased estate, 25% of licensees received training in FY2013. “This will remain a priority for 2014,” said Tye.
Apprentices
Spirit said its aim is to have an apprentice in every pub on one of the five available programmes it has across all its brands; it currently has more than 1,050 apprentices either working towards or already graduated from level 2 and level 3 qualifications. “The apprenticeship programme has demonstrated real value within Spirit, with retention rates of 89% and promotion within the business at 49%. We have a higher than industry average number of apprentices completing our programme in time at 83% compared to the average of 57%.”
Analysts
Douglas Jack at Numis increased his Target Price to 100p and issued a Buy recommendation.
“Full year results are in line with PBT up 6% to £54.3m (our forecast £54.1m; consensus £54.7m). Encouragingly, recent trading is strong with managed pub LFL sales up 4.0% and Leased LFL EBITDA stable (-0.3%). Although trading guidance is improving, we are holding our forecasts due to higher interest costs from the proposed refinancing of the A1 and A3 bonds; a progressive exercise that should pave the way for faster growth. Thus, we are increasing our target price to 100p.
“We are holding our 2014E PBT forecasts (£57.9m; consensus £59.7m), with the 53rd week offsetting £1.5m of extra facility fees and higher LFL trading guidance offsetting an expected c.£2m increase in bond interest costs after the refinancing. All negative issues are being dealt with, leaving the company well positioned to accelerate growth, justifying, in our view, another re-rating.”
Simon French at Panmure Gordon reiterated his Buy recommendation and 110p Target Price for Spirit.
“Spirit has announced FY 2013A results broadly in line with expectations reporting £54.3m PBT (6.3p EPS) compared to consensus forecasts of £55.4m PBT (6.4p EPS) and our top-of-the range forecast of £56.1m PBT (6.4p EPS). The dividend has been increased 5% to 2.05p compared to market expectations of 2.13p. Current trading for the eight weeks to 12 October is encouraging with managed pub LFL sales +4.0% and leased LFL net income -0.3%.
“The group has launched a debt re-profiling proposal which will see A1 and A3 bond note holders offered A6 and A7 notes respectively which will have a higher coupon but longer-term maturity thereby improving the group’s financial flexibility. We would therefore expect consensus forecasts for FY 2014E to reduce from £59.4m PBT (6.9p EPS) to c£56-57m PBT. The stock is the least expensive amongst the pub and restaurant companies trading on a CY 2014E adjusted EV/EBITDAR of 7.5x and yielding 3.3%.”
Nick Batram at Peel Hunt issued a Buy recommendation.
He said: “The proposed debt restructuring, together with a positive start to the year, confirm our view that Spirit looks good value against its peers. There are some cost headwinds, but a more flexible balance sheet addresses one of the key elements that have been holding back the multiple.”
