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Morning Briefing for pub, restaurant and food wervice operators

Tue 28th Jun 2016 - Update: Shepherd Neame acquisition, effects of an “unruly Brexit”
Shepherd Neame completes purchase of seven Enterprise sites: Shepherd Neame, the Kent-based brewer, pub and hotel operator, has completed the acquisition of seven Enterprise Inns pubs in Kent, Sussex and Surrey. The purchase of the eighth pub is expected to complete in due course. The pubs are: Chequer Inn in Steyning, West Sussex; Crown & Anchor in Shoreham by Sea, West Sussex; The Farm House in West Malling, Kent; The Greyhound in Keston, Kent; Hen & Chickens in Bisley, Surrey; The Kings Head in Guildford, Surrey and The Sussex Oak in Warnham, West Sussex. All the pubs will continue to operate under their current lease, and during the past fortnight, representatives from Shepherd Neame have met with the licensees to discuss transitional arrangements and future investment plans. The completion of the sale takes Shepherd Neame’s total number of pubs to 335, of which 59 are operated under management and 269 as tenanted and leased and seven under commercial free of tie leases. All Shepherd Neame pubs will be operated under the Voluntary Code of Practice.

Jamie Rollo – here’s how we see an unruly Brexit affecting the leisure sector: Morgan Stanley leisure analyst Jamie Rollo has set out how he sees an ‘unruly’ Brexit affecting the sector. He noted that the sector is ‘cyclical with high exposure to UK discretionary spending’. He said: “The Leisure sector is skewed towards mid-cap companies with a high domestic UK consumer discretionary exposure. While the referendum result should have no direct impact on the companies in the Travel and Leisure sector, there will be a knock-on impact from any changes to economic growth, corporate / consumer confidence, and currency. We see the main secondary impacts on tour operators (highly discretionary and a high ticket product, UK overseas holidays will become more expensive), eating out (pubs and restaurants impacted by consumer confidence), hotels (skewed to corporate demand which could be affected by delayed decision-making and lower confidence), and online gambling (Gibraltar licence no longer valid). We see the foodservice stocks (Compass, Sodexo) as least impacted (90% of Ebit from outside the UK), with Compass due to benefit from an 8% FY17 EPS upgrade from currency translation. We are not changing forecasts at this point, but change our order of preference. The political and economic landscape is highly uncertain, so we screen stocks for mark to market currency rates, like-for-like sales volatility, and EPS sensitivities. Lower GDP growth would clearly put downward pressure on forecasts, and as more clarity emerges we expect to reduce sector-wide forecasts, with most risk at tour operators, hotels and cruises. We see circa 20% downside risk to our 2017e EPS forecasts in an “unruly Brexit” scenario. Our top “safe” picks are Sodexo, Playtech, and Merlin, but we also see value in riskier names like Whitbread, TUI, M&B and Paddy Power Betfair. Indeed, Whitbread and M&B’s share price reaction seems extreme relative to our bear case EPS downside. We are concerned about an “unruly Brexit” scenario, which could cause a recession across Europe. We take our economists’ high-stress scenario, with a 0.3% drag on our baseline global GDP growth forecast in 2016 and a 0.7% impact in 2017, with UK GDP growth slowing to a level of 0.8% and 0.5% in 2016/2017. We assess the like-for-like sales performance during the worst 12 month period in 2008/2009, and assume a high-stress scenario leads to roughly half of this decline for each company to calculate EPS in a recession scenario. These recession case EPS suggest 2-59% downside risk to current forecasts, with a weighted average downside of 20%. The most downside risk is in low-margin operationally geared businesses such as leasehold hotels (MEL, SHOT), tour operators (TCG, TUI), cruise lines (CCL, RCL), and retail betting companies (WMH, LAD). The sector has dropped circa 11% since the referendum result, taking valuation levels to below their long-term averages. The leisure sector tends to have pro-cyclical valuations, with stocks trading on peak multiples on peak earnings, and vice versa. If macro news deteriorates, we would expect the sector to continue to de-rate. The current weighted average sector P/E of 15.3x is a little below its long-term average of 15.8x, but we see around 30% downside risk to an adjusted trough P/E of 11x in a recession. If we slip into recession, we see c.20% downside risk to EPS forecasts for the sector as a whole, a little better than the c.30% cuts seen in 2009; with the sector down c.11% in the last couple of trading days, it should stabilise after another c.13% drop if there is a recession. Within this, we see foodservice and online gambling as likely to be the most resilient. In the short term, the sector would likely overshoot on the downside, suggesting up to 40% downside risk if we apply trough multiples to our recession EPS forecasts. We see c.20% upside potential if we are not entering a recession. There is 18% upside on a weighted basis if every stock hits our price target, and 28% upside to 12-month share price highs for the sector. Our top “safe” picks are Sodexo, Playtech, and Merlin, but we also see value in riskier names like Whitbread, TUI , M&B and Paddy Power Betfair.”

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