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Fri 25th Jan 2013 - Breaking News
Douglas Jack – Buy Enterprise Inns shares: Numis Securities analyst Douglas Jack has issued a Buy recommendation on Enterprise Inns shares with a Target Price of 110p ahead of a trading update next Thursday. He said: “Thursday’s (first quarter trading update) should indicate that like-for-like net income has weakened due to largely one-off factors. We believe Enterprise is making good operational progress, which should be reflected in a return to positive like-for-like net income growth in H2. This could drive a further recovery in the share price, even after such a strong run. We expect like-for-like net income, which fell 1.2% last year, to be down circa 3% in Q1 due to poor weather and disruption from supplier WaverleyTBS going into administration. However, we expect to retain our full year assumption of -1.3% like-for-like net income due to an improving underlying trend (ex-Waverley and snow) and easier second half comparatives. The improving underlying like-for-like trend relates to: more growth-orientated investment; selling more higher-margin product; buying cheaper; supplying Sky TV and food to tenants, applying bulk purchasing discounts; as well as reducing the number and cost of business failures (a substantial opportunity from a cost of £29m in 2012). Management targets reducing the number and cost of business failures through better licensee recruitment and support, repair and maintenance funds, accountancy support and a 20% increase in the ratio of BDMs-to-pubs. Completing the five-year rent-rebasing cycle (from 2007 peak levels) should benefit rent (68% index-linked); average beer discounts have barely changed for 17 months. The Statutory Code proposal is unlikely to help sentiment, but the pubcos are already complying with self-regulation and BIS has stated that the code “will not mandate a free of tie option with open market rent review”. “Neither will it abolish the beer tie”. A Statutory Code might help to end a long debate, but after a 19% increase in tax/Enterprise pub in four years (whilst Enterprise cut its take by 12%), it is possible the Business Secretary failed to target the correct culprit. This year, a targeted £150m of disposal proceeds from 250 pubs should enable debt to fall 8% versus a 5% forecast decline in EBITDA. Our 110p target price equates to 9.5x EV/EBITDA (or 19% equity free cash flow yield), in line with the company’s 2009 recession valuation. We believe there could be attractive equity upside should like-for-like net income turn positive, which is a key short-term target for the company.”

Simon French – Mitchells & Butlers like-for-likes set to lag peers; reiterates Sell recommendation: Panmure Gordon analyst Simon French has reiterated a Sell recommendation on Mitchells & Butlers shares ahead of its trading update next Thursday – he has set a target price of 225p for the shares. He said: “We expect the group to have traded solidly over the Christmas and New Year period but expect it to continue to lag the peer group in terms of like-for-like sales growth. After the first eight weeks of financial year 2013 managed pub like-for-like sales growth was -0.1%. Following industry data and updates from peers combined with two weekends of snow, we reduce our year-to-date like-for-like sales assumptions from c+1% to c-1%. Consensus expectations are for £181.2m profit before tax (33.2p EPS) in financial year 2013 and our forecasts are modestly below consensus. The stock trades on a CY 2013E adjusted EV/EBITDAR of 7.5x, an unjustified premium to Wetherspoons and in line with The Restaurant Group. Combined with our caution on the UK consumer we reiterate our Sell recommendation and 225p Target Price, implying circa 27% downside potential.”

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