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Thu 21st Nov 2013 - Breaking News - Analyst: growing demand backdrop for expansion
Analyst: growing demand backdrop for expansion: Numis Securities leisure analyst Douglas Jack has issued an upbeat investment note on the growth prospects for a number of major quoted sector companies. He said: “Capital is flowing and consumer demand is growing, providing a favourable backdrop for expansion into segments with superior demand/supply dynamics, such as leisure parks, transport hubs and food-led pub restaurants. Our target prices assume less re-rating in 2014, but there is still sufficient growth to drive attractive equity upside, particularly for Domino’s Pizza and Spirit Pub Company. Demand is growing for both pubs and restaurants, encouragingly against a backdrop of pub supply falling at 3% per annum. However, restaurant supply rose 8.6% in the year to June 2013, a level of over-expansion that is likely to lead to casualties when the economy inevitably starts to tighten. Thus, it is unsurprising that pubs have outperformed restaurants in the Peach Tracker over the vast majority of 2013. Quoted managed pub/restaurant like-for-like sales are currently growing at an average of 4.2%, with margins increasing slightly. Against this backdrop, operators are stepping up expansion, critically targeting superior segments (like leisure parks, transport hubs and food-led pub restaurants). Fuller Smith & Turner, Domino’s Pizza and Greene King have the strongest like-for-like sales. Prezzo, The Restaurant Group, Domino’s Pizza and JD Wetherspoon have the strongest expansion. Cost inflation is 2.5-3%, helped by low-inflation items typically accounting for two-thirds of the cost base. In 2014E, we estimate that 2.5-3.0% like-for-like sales (higher if discounting steps up) will be needed on average, before cost mitigation, to maintain EBIT margins. All quoted tenanted/leased pub estates are stable or in like-for-like profit growth, boosted by investment, tail-end disposals and the adoption of managed pub disciplines. The proposed Statutory Code is an unnecessary risk, in our view. For 2014E, we forecast average earnings growth of 8.1% (excluding Punch Taverns, our forecasts are 0.3% above consensus on average) after assuming average like-for-like sales slow to 2.7%, from 4.2%. Our forecasts assume minimal improvement in the consumer backdrop, cautiously expecting big-ticket retail to be the main beneficiary if economic policy remains growth-orientated until the May 2015 General Election. Of last year’s 37% average share price growth, 30% was due to re-rating. However, we believe the licensed retail sector is slightly undervalued overall at 9.2% equity FCF yield, 9.4x EV/EBITDA (in line with the 10-year historical average) and 14.1x P/E. In comparison, for 2014E, we forecast average earnings growth of 8.1%, average dividend yield of 2.5% and 4.4% average debt reduction. Overall, our target prices assume that the re-rating process is largely complete. On this basis, if forecasts hold, there is sufficient debt reduction/EBITDA growth to drive attractive equity upside, particularly for Domino’s Pizza (Buy; Target Price of 710p) and Spirit Pub Company (Buy; Target Price of 100p). We believe Domino’s Pizza is capable of over 20% earnings growth in 2014E, implying a sub 1x PEG for the almost debt/capex-free company. In our target prices, re-ratings are limited to Enterprise Inns (Add; reflecting efforts to sustain like-for-like net income growth; Target price; 170p), Marston’s (Buy; undervalued; Target Price: 185p), Mitchells & Butlers (Buy; undervalued; Target Price of 500p) and Spirit Pub Company (Buy; undervalued; Target Price of 100p). We also target a de-rating for Prezzo (Hold), which we view as overvalued.” His recommendations for other companies are: Restaurant Group (Add with a Target Price of 600p), JD Wetherspoon (Add with a Target Price of 815p), Greene King (Add with a Target Price of 925p), Fuller, Smith and Turner (Add with a Price Target of 1,050p).
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