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Morning Briefing for pub, restaurant and food wervice operators

Sun 27th Apr 2014 - Breaking News - Senior analyst upgrades pub and restaurant companies
Analyst Geof Collyer upgrades rating on all sector companies covered: Deutsche Bank analyst Geof Collyer has upgraded his ratings on the major sector companies he covers as economic recovery "plays to their strengths after eight years of repositioning". Collyer’s new report shows a large but fragmented UK market with considerable growth opportunities for major quoted companies. Relying on Propel Info’s Blue Book publication, which lists the 200 largest food and beverage operators in the UK marketplace, he says: “Propel Info produces a detailed list of the top 200 or so companies that make up the pub and restaurant space. It is a movable feast year on year, as more groups achieve critical mass or just appear on the radar through publicity in the media. We have sorted Propel’s data (predominantly 2012 and 2013 accounts) into six categories (managed pubs and bars, managed/tenanted/brewing, restaurants, single-brand restaurant groups, concessions, pure tenanted/leased, and Other). The 208 companies featured account for about 37% of the INS consumer spending sales on eating and drinking out.” He concludes that the major quoted companies researched by Deutsche Bank account for just 6% of the 208,000 outlets in the market and 12% of the £70bn of revenues in the eating and drinking out market. Collyer concluded: “After eight years of repositioning, all of the sector’s major groups are now in much better shape, operationally and financially, than they have been for the past 25 to 30 years. With improving employment, rising real wages and the UK economy turning up, the pub and restaurant sector – focused on affordable treats for value conscious consumers – appears to be in a sweet spot as far as the future is concerned. We have upgraded our view on all of our companies. The last six years have seen some of the worst trading conditions that the pub industry has experienced probably since the Second World War. However, whilst beer volumes have fallen heavily, the eating out market has continued to grow – declining in nominal terms in only six out of 196 quarters since records began back in 1964. This has provided the pub operators with scope to transform their businesses from rearguard defensive operations into ones capable of real growth. We have seen some recovery since the previous peak of 2007, but most of the quoted groups’ profits remain below peak levels. Because of their repositioning, and because they are looking into a period of economic upswing that should play to their strengths, we have argued in this note that the target price EV/ebitda multiples should increase by one turn of their 10-year forward averages. Our investment preferences are driven by the groups that are self-funding most or all of their growth – as a hedge against the rising cost of debt. We have increased our FY 2015 & FY 2016 forecasts for Greene King ("buy"), M&B (upgraded to "buy" from "hold"), and for Spirit ("hold"); and have downgraded Marston’s ("hold") FY ’14E only. We have maintained forecasts for JD Wetherspoon ("hold"), which, along with Spirit, is the most operationally geared group in the sector. We have maintained Enterprise Inns ("buy") as our special situation. We have upgraded our target prices for all of the pub retailers by between plus 13% and plus 43%. In addition, we are initiating coverage on the Restaurant Group ("hold"), which, our analysis suggests, has been the best performer over the past decade, and may well be over the next five years as well – much of which is in the rating.” The Propel Info Blue Book of the UK's 200 largest operators includes turnover and profit figures, directors’ salaries for the past five years and profit conversion percentages. It is available to buy by e-mailing

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