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Morning Briefing for pub, restaurant and food wervice operators

Wed 21st Oct 2015 - Jamie Oliver divests subsidiary interests, takes £10m dividend
Jamie Oliver divests and closes Jamie Oliver Holdings subsidiary businesses to focus on media and licensing as turnover nears £40m: Chef Jamie Oliver has taken a £10m “property dividend” as turnover in his Jamie Oliver Holdings vehicle rose 21% to £39.7m in the year to 31 December 2014 – it made a pre-tax profit of £7.1m. The rise was linked to increased revenue for Oliver’s two TV production companies – Fresh Made Productions and Fat Lemon Productions – and endorsement income from Woolworths in Australia and Sobeys in Canada. The company had exceptional items of £18,117,403, including the impairment of his food range company JME (£9,384,910), cookery school business Recipease (£7,172,980) and Fifteen Restaurant (£562,183) to produce a loss of £12,818,072. The company stated it was divesting itself of subsidiary companies through closures, and management buy-outs to focus on its core media and licensing activities. The company said it transferred an investment property with a net book value of £10m to Jamie Oliver and his wife Jules by way of a “dividend in specie” – £6m of the value went to Jamie Oliver and £4m to Jules. An additional £200,000 dividend was paid. The company added: “The directors believe that with the two new endorsement deals, high level of other contractual income, a further book planned for 2015 plus strong income from international licensing of Jamie Oliver TV programmes, income from Jamie Oliver TV work in 2015 plus an ever-improving economy, the group should see a solid performance in 2015. 2015 will be a year of consolidation and significant resources will be devoted to developing and promoting new digital and online content and channels.” Jamie’s Italian is a separate business.

Jamie Rollo – we question whether Greene King’s quest for scale is now appropriate: Morgan Stanley leisure analyst Jamie Rollo has issued a lukewarm note on Greene King, questioning whether its quest for scale is now appropriate. He said: “Greene King is now the UK’s largest managed pub operator with a solid track record, well-invested pubs, scope for large Spirit savings, and a 4% dividend yield. But we think the low valuation multiple is deserved given it faces a tough competitive landscape and possible dilution from pub sales. Greene King has an attractive pub estate and geographical position, a solid track record, should see an acceleration in earnings per share growth from its recent Spirit acquisition as synergies flow through (we estimate 13% earnings per share growth in FY17), and offers a circa 4% dividend yield that is covered 2x. The industry backdrop is increasingly tough, both for sales (pressure of new capacity in the eating out market), costs (National Living Wage), and regulations (Market Rent Only option). We therefore see earnings per share growth reverting to mid single digits post FY17 (as in FY15 and FY16e). The three key investor debates: (1) How big can the Spirit merger synergies be? We assume £55m gross savings by FY18, based on benchmarking previous deals and including revenue synergies, or £45m net of reinvestment (10% to pro forma Ebit), well above the £30m target; (2) Will like-for-like sales improve enough to deal with wage cost pressures? We assume 2% like-for-like retail sales and flat margins ex synergies, giving a fairly stable profit outlook. Greene King no longer outperforms the market and we think shifting consumer behaviour, high supply growth in pub restaurants and casual dining, and competition with supermarkets and cafes will keep growth low. We assume around half the National Living Wage pressure can be mitigated; (3) What is the future shape of the company? We think the combination of the National Living Wage, Market Rent Option and challenging competitive environment may force further tenanted and managed pub disposals, which could mean mid to high single digit earnings per share dilution. A lot has changed since Greene King first announced its plan to buy Spirit, with a much tougher outlook for managed pubs and a rather bleak outlook for tenanted and brewing. We question whether the company’s acquisitive nature and quest for scale are now appropriate. Reasonably attractive risk-reward, but better value elsewhere. Greene King trades on 11.5x calculated 16e price-earnings ratio and 8.6x EV/Ebitda, below its historical average but above its peers. Our 850p price target is based on an average of four different valuation methods, and implies 6% potential upside. The main risks are a weaker economy, adverse legislation, lower synergies, dilutive disposals, and a poor acquisition. In the pub space, our preference is for Mitchells & Butlers (Overweight), and we are Underweight on Enterprise Inns and JD Wetherspoon.”
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