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Mon 22nd Jun 2015 - Analyst – new strategy could double Enterprise share value
Douglas Jack – Enterprise’s new strategy could see shares double in value over five years: Numis Securities leisure analyst Douglas Jack has issued a ‘Buy’ note on Enterprise Inns shares, with a target price of 160p, after concluding Enterprise’s new strategy will enhance earnings – and argued the 160p share price valuation could double over the next five years. He said: “Enterprise Inns’ new strategy should have a substantial long-term impact on its earnings composition, even if the impact on earnings is likely to be limited over the next two years. We expect the new strategy to enhance the level and quality of earnings from 2017E. We are raising our recommendation to ‘Buy’ (from ‘Add’) and target to 160p, from 150p/share. The Market Rent Only option (MRO) legislation is flawed, in our view, as it disincentivises investment and would potentially erode leased pubs’ purchasing power and profitability. Enterprise’s new strategy should minimise its exposure to sub-optimal MRO conversions, resulting in the new legislation having limited materiality to forecasts (we forecast the MRO taking £2.0m off Ebitda in 2017E). The new strategy should provide a platform for Ebitda growth through managed pub conversions. We forecast managed conversions boosting Ebitda by £5m in 2017E (after increased central costs) and by £19m in 2020E (also after central costs), at which point the company expects to have 800 managed pubs. Enterprise intends to build a commercial leased estate of c.1,000 pubs. We expect these conversions to dilute Ebitda in affected outlets by 5% initially, prior to recovering due to RPI-linked rents. Through improving earnings quality (the commercial leases are currently valued at 12x Ebitda externally), this increases the likelihood of a re-rating, supported by the possibility of a REIT conversion. Despite the development of a managed estate, less capex saved in commercial leases, increasing net capex by c.£100m over 2015-2020E, we expect net debt/Ebitda to fall from the current level of 7.9x to 6.3x in 2020E. This reduction should be driven by debt reduction (in each year) and a return to absolute Ebitda growth (from 2019E), based on our cautious forecast assumptions. Our 2015-2017E forecast assumptions are: 0.1-0.5% like-for-like net income for leased/tenanted; as well as 1.1% like-for-like sales for managed. We also believe our managed margin forecasts are cautious. Although the new strategy has execution risks (in addition to requiring bondholder approval), it is appropriate, in our view. We estimate that our 160p sum-of-the-parts valuation (December 2015) could double over the next five years.”

Wimbledon Brewery starts production today, tap room opens: The Wimbledon Brewery starts production at its 30-barrel brewery at College Fields, Prince Georges Road, Wimbledon, today. Wimbledon Brewery beer will initially be available at venues throughout the borough of Merton and south west London. The first beer is the appropriately named ‘Common Pale Ale’. This will be followed by other beer styles and seasonal ales. The brewery will house a tap room/bar and a shop. Brewery tours, brewing courses, tastings, private hire for parties and sports viewing will also be on offer. Mark Gordon, 46 year-old entrepreneur and Wimbledon resident, has founded the brewery and has partnered with Master Brewer, Derek Prentice, who is head brewer. Gordon: “It’s been 18 months in the making but I’m pleased to say we are now officially open for business. We aim to be a source of pride for the people of Merton. The combination of Derek’s expertise and experience together with ingredients of the highest quality means an exceptional beer. We aim to be the preferred choice for discerning beer drinkers.” Prentice added: “Our philosophy is to utilize the best of English brewing traditions and the best ingredients. The core range will be brewed using one of my favourite barley varieties, Maris Otter, and our hops will include the classic English varieties.” 

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