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Fri 7th Aug 2015 - Analyst - Enterprise embarking on most ambitious transformation ever seen
Jamie Rollo – Enterprise embarking on most ambitious transformation ever undertaken: Morgan Stanley leisure analyst Jamie Rollo has this morning cut his Enterprise Inns share recommendation to ‘underweight’ and reduced his price target to 90p, arguing the company is embarking on, probably, the most ambitious transformation a pub company has ever undertaken. He said: “Enterprise’s five-year plan to completely change the shape of its pub estate is very bold, but it also highlights how much needs to be done to fend off unprecedented regulatory and structural pressures. FCF is weak, leverage high. We cut 2018e EPS 15% and downgrade our rating to Underweight. The combination of the ‘Market Rent Only’ regulation (gives pub tenants that are tied for beer the right to elect for a free-of-tie rent), tough trading conditions, growing competition, and structural pressures lead Enterprise to embark on probably the most ambitious transformation a pub company has ever undertaken. It plans to sell c. 20% of its 5,200 pubs, convert another c. 20% to a free-of-tie commercial propco, and another c. 15% to managed pubs, leaving it with c. 45% of its current pubs under its existing tied tenanted model. This should leave it better able to optimise its assets, with a higher quality income stream, and additional value could be created by separating the different businesses. If all goes well, our bull case is 220p. But we see a U-shaped recovery: A new managed business will require upfront overhead, higher capex, and profit sharing with third parties, and even then its pubs appear too small to warrant direct management. The free-of-tie pubs will likely see a drop in income as the rent increase will not fully cover lost beer margin, the remaining tied pubs may have to be offered incentives to stay, and Enterprise may struggle to reduce overheads in line with the 55% drop in tied pub numbers. We see a U-shaped profit profile with Ebitda falling from £297m in 2015e to £273m in 2018e before a return to sustainable growth, and we cut our 2018e EPS forecast by 15%. Meanwhile FCF is weak, leverage high, and the risk profile rising: Half group FCF is in Unique, the securitised debt vehicle into which Enterprise is having to inject £15-20m annually to help it fund its debts, meaning PLC FCF is actually minimal. While there are no pressing refinancing needs, ongoing net debt: Ebitda of >7x is high given the higher risk profile, and Enterprise needs bondholder consent for some of its proposals. The company may consider raising new equity to help reduce and extend its debts. NAV per share drops c. 100p if we exclude goodwill, assume another writedown, and cash needed to refinance debts. We reduce our PT to 90p and our rating to underweight.”

SSP buys German bakery business for £5m: UK-based transport hub specialist SSP Group has agreed, subject to conditions, to acquire 32 outlets in Germany from Wiener Feinbäckerei Heberer GmbH for approximately £5m. The outlets sell bakery products in travel locations in Germany, with 30 of them located in railway stations and two in airports. The acquisition of these outlets will further strengthen SSP’s presence in travel locations in Germany. The value of the gross assets being acquired is approximately £5m, and the profit attributable to the assets in 2014 was approximately £1 million.

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