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Morning Briefing for pub, restaurant and food wervice operators

Wed 8th Feb 2017 - Analyst issues Enterprise ‘Add’ recommendation, K10
Douglas Jack issues ‘Add’ recommendation on Enterprise Inns: Peel Hunt leisure analyst Douglas Jack has initiated coverage on Enterprise Inns with an ‘Add’ recommendation. He said: “We are initiating coverage with an ‘Add’ recommendation and a 155p target price reflecting material improvements in the fabric of the estate and in operations since 2013. In addition, with 73% of rental income being index-linked, we believe there could be further upside from higher inflation, which is not built into our forecasts. The size of Enterprise’s estate has halved since 2004, largely as a consequence of tail-end disposals. This has enabled capex per leased/tenanted pub to rise by 27% since 2012, since when the ratio of capex that is orientated towards growth (rather than maintenance) has risen from 23% to 58%. Enterprise has increased its operational focus, through estate segmentation, stronger licensee support and broader central purchasing, utilising the managed pub disciplines that it is now able to nurture. Enterprise transferred profits to struggling licensees between 2009 and 2013, resulting in Enterprise suffering like-for-like net income declines. With licensee financial welfare measures (overdue balances and unplanned business failures) now as good as they have been at any time in at least the last ten years, the need to re-allocate profits to the licensees has ceased, in our view. With half of the tenanted/leased estate now being based in Southern England, and of improved quality, it is possible that index- linked rent increases will have greater traction in the future, even though inflation is forecast to increase. RPI forecast to reach 3.5% in 2017. We believe our forecasts are cautious, assuming no like-for-like net income growth (2016: +2.1%), and we estimate our 2020E Ebitda forecast is £11m or 4% below guidance, with the latter taken as the mid-point of a range outcomes provided for each operating model. Enterprise Inns’ P/E and EV/Ebitda valuations are broadly in line with their ten-year historical average, but its quality of earnings and operations are better than at any other time during this ten-year period, in our view. We believe the company’s rating could grow further, narrowing the 52% discount to NAV, if positive like-for-like net income and managed expansion start to drive stronger earnings growth.”

Domino’s Pizza Poland updates on sales growth: Domino’s Pizza Poland has reported like-for-like system sales are up 27% and total system sales are up 62% in the last 13 months. A total of 16 new stores opened and ten more towns came on stream in the period. There are currently 39 Domino’s Pizza stores in 14 Polish towns and cities, 16 corporately managed and 23 sub-franchised. There have been 17 consecutive quarters of double digit like-for-like system sales2growth, Q4 2012 – Q4 2016. In 2016, the company welcomed six new sub-franchisees who now operate 23 stores between them. A total of nine stores were opened by sub-franchisees between 1 January 2016 and 8 February 2017. A total of 71% of delivery sales are online. The company has a second commissary scheduled to open in mid-year to support this rapid growth in system sales. Peter Shaw, chief executive of DP Poland, said: “In 2016 12 new Domino’s Pizza stores were opened and we welcomed six new sub-franchisees on board. In the first five weeks of 2017 we opened four further stores. Of the 39 stores operating today 23 are operated by our eight sub-franchise partners. We are now operating in 14 towns and cities and will see more added through the year. This step change in store roll-out and system sales growth is set to continue through 2017 as we invest in real estate development, store operations, dough production capacity and food warehousing.”

K10 opens first takeaway only unit: London-based K10, the sushi brand led by Maurice Abboudi, has opened its first takeaway only unit in London’s Coleman Street along with Hop, Coco Di Mama and Blacksheep. The company’s website states: “Alongside fresh sushi, sashimi and salads you will also find a range of hot dishes, including chicken and salmon katsu curries, teriyakis, tempura and our great chilli baby squid. We’ve been serving up great food in the City since 2000 and have consistently been acknowledged as London’s best kaiten restaurant. We do not have central kitchens and there are no microwaves in K10. All our food is prepared and cooked in the K10 restaurant kitchens. Our chefs use the freshest ingredients to create a traditional Japanese menu with a modern twist.” It has other sites in Appold Street, Copthall Avenue and Minster Court. K10 City Sushi, a subsidiary of K10 (London) Limited, reported turnover of £2,435,996, in the year to 31 December 2015 (2014: £1,949,012) and pre-tax profit of £214,431 (2014: £142,551).

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