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Thu 11th Jun 2015 - Analyst: Pub/restaurants cos set for 3 years of strong earnings growth
Simon French – pub and restaurant companies entering period of above average growth: Cenkos leisure analyst Simon French has argued this morning, in a 30 page research note, that pub and restaurant companies are entering a period of above-average earnings growth. He stated: “Pub and restaurant companies are entering a period of above average earnings growth driven by above-inflation like-for-like sales growth, new site openings, a benign cost environment and selective merger and acquisitions. We expect this to last for up to three years and for stocks to re-rate accordingly. The sector is not expensive trading on a CY 2016E adj EV/Ebitdar of 9.9x and a P/E of 16.4x. We forecast three-year CAGR in EPS of 8.4% on some fairly undemanding assumptions. M&A is gathering pace and we expect this to continue as management teams grow increasingly confident. The biggest risk is rising interest rates which may curb disposable income growth but we believe eating out will continue to thrive given how it has become embedded as part of the UK social calendar. Supply led growth: CGA estimates circa 2,000 new restaurants have opened in the past 12 months. This reflects low barriers to entry, easy access for capital (driven by crowd funding) and a strengthening economic recovery. However, we are starting to notice restraint amongst the public companies with Greene King, Marston’s, Mitchells & Butlers and Wetherspoons all dialling back on new site expansion. This most likely reflects their historic pub positioning with strongest new site growth being seen in the casual dining sector led by Restaurant Group and privately owned companies such as Casual Dining Group, Wagamama, Bills, Cote and Loungers. Three Buys: Our top pick is Mitchells & Butlers, which has the most attractive market positioning, highest confidence in earnings estimates and is the cheapest stock on most valuation metrics. Greene King also offers a compelling investment case with the synergy delivery from Spirit Pub Company to come. However, the core business has underperformed over the past 12 months and we have downgraded our forecasts. We remain positive on Restaurant Group given good visibility on the rollout and casual dining exposure but remain cautious given customers’ preference to trade up. Three Sells: We continue to struggle to reconcile like-for-like profits growth at Wetherspoons and ROIC>WACC from new sites with flat lining Ebit. Operating margins may finally have troughed but the group no longer has a USP and is the highest leveraged company in our coverage universe. Domino’s Pizza remains a market leader but competition is increasing dramatically, including via the PizzaExpress delivery only format and this is not adequately reflected in the rating. Compass continues to be a highly rated stock relative to its history and given the earnings and risk profile.”

Spirit shares to de-list on 24 June: Greene King has announced that its acquisition of Spirit Pub Company is no longer conditional on Competition and Markets Authority approval and as such the acquisition is scheduled to complete on 23rd June. Spirit Pub Company shares will be suspended on 23 June and de-list on 24 June and trading of shares in the new Greene King, absorbing Spirit, will begin the same day. A special dividend of 6.5p per share will be paid on 7 July. 

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