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Wed 6th Jun 2018 - Update: Peel Hunt on Fuller’s
Douglas Jack – current trading at Fuller’s should be ‘better than the shares suggest’: Peel Hunt leisure analyst Douglas Jack has said current trading at London brewer and retailer Fuller’s should be “better then the shares suggest”. Issuing an ‘Add’ note on the shares with a target price of 1,150p ahead of the company’s preliminary results on Friday (8 June), Jack said: “We forecast managed like-for-like sales being up 3.0% versus 3.4% in quarters one to three against a tougher weather-affected backdrop in quarter four; the London pubs constituent of the Coffer Peach Business Tracker fell by 1.0% in the fourth quarter versus rising by 1.2% in quarters one to three. However, recent trading should be stronger: Young’s managed like-for-like sales rose by 7.5% in April to May versus 4.2% in the year to March. Over the past three years, Fuller’s like-for-like sales have averaged 5.0%, versus a 2.3% average for the London pubs constituent of the Coffer Peach Business Tracker. We believe this reflects a strong culture for differentiated product and service; and the company investing in its venues and staff. This is consistent with Fuller’s premium positioning, the strongest performing segment in the sector. We forecast managed margins being down 20 basis points. Fuller’s needs 4% growth in like-for-like sales to maintain managed margins, which is higher than the peers due to Fuller’s higher London-orientation (for example, having to absorb a 26% increase in business rates). Tenanted like-for-like profits rose by 2% in quarters one to three and are forecast to remain at this level over the full year. Like-for-like profit in the more wet-led tenanted pub sector has matched like-for-like sales in the managed pub sector since 2015, but has pulled ahead in profit terms due to wider central purchasing, rising asset quality and the ability of licensees to avoid some cost pressures. Against such a backdrop, we expect 10% of Fuller’s tenants to have converted to turnover-based franchise agreements. Brewing volumes were flat in quarters one to three and are forecast to be level over the full year. We expect three managed pubs to have opened (including two conversions from tenanted/leased). The pipeline for 2019E should include two openings in transport hubs (The Signal Box at Euston station and The Parcel Office at Liverpool Street). Like-for-like trading should be positive in both pub divisions despite poor weather, and accelerating in early 2019E. We expect to hold our forecasts (which assume just 2% like-for-like sales in managed) and would use recent share price weakness as an attractive long-term buying opportunity, noting the company’s large valuation discount to Young’s (Ten times versus 12 times EV/Ebitda).”

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