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UK Pubs Underweight the Sector
20 January 2009
Travel & Leisure
Companies included
Enterprise Inns PT 35p SELL
(ETI.L/ETI LN) FY1 FY2
PBT (£m) 228.2 223.8
EPS (p) 33.97 32.84
Fuller, Smith & Turner PT 430p BUY
(FSTA.L/FSTA LN) FY1 FY2
PBT (£m) 21.4 22.1
EPS (p) 26.75 27.62
Greene King PT 570p BUY
(GNK.L/GNK LN) FY1 FY2
PBT (£m) 115.6 114.6
EPS (p) 64.22 63.70
JD Wetherspoon PT 300p HOLD
(JDW.L/JDW LN) FY1 FY2
PBT (£m) 44.6 46.0
EPS (p) 21.29 21.96
Marston’s PT 100p REDUCE
(MARS.L/MARS LN) FY1 FY2
PBT (£m) 68.3 68.8
EPS (p) 19.04 18.89
Mitchells & Butlers PT 310p BUY
(MAB.L/MAB LN) FY1 FY2
PBT (£m) 105.0 116.0
EPS (p) 18.09 20.05
Punch Taverns PT 30p SELL
(PUB.L/PUB LN) FY1 FY2
PBT (£m) 160.3 164.4
EPS (p) 46.72 47.15
Young & Co Brewery PT 440p HOLD
(YNGa.L/YNG LN) FY1 FY2
PBT (£m) 18.7 18.8
EPS (p) 28.47 28.60
Next news expected
Enterprise Inns Q1 IMS – 22 Jan
Fuller, Smith & Turner IMS - Feb
Greene King Q1 IMS – End Jan
JD Wetherspoon IMS – 20 Jan; H1 - Mar
Marston’s Q1 IMS – 23 Jan
Mitchells & Butlers Q1 IMS – 29 Jan; H1 May
Punch Taverns H1 – Apr
Young & Co Brewery H1 – 28 May
James Dawson
020 7149 6423
james.dawson@csysecurities.com
Natural Selection
Darwinism in a pint glass – A more frugal consumer is translating into increased
local competition, intensifying the pressure on weaker operators. Whilst we are not
aware of any pub operators actively targeting the local competition, some groups are
already acknowledging that the way to achieve long term survival is through the
adoption of the “Last Man Standing” mentality. With this in mind the question is
who do we expect to prosper and which are likely to slowly remove themselves from
the pub pool room? Avoiding the temptation to overly complicate the investment
approach we believe there are three criteria for ranking pub stocks: pub estate
quality, the level of control over pubs and debt affordability. Pub estates that
demonstrate these attributes will survive and prosper!
Quantifying Quality – We perceive the core ingredients for a good quality pub
remain; an affluent catchment area, minimal local competition and a committed
licensee. The stronger these components are across an estate the higher the
profitability per pub should be. In this report we have reviewed sales per pub and
EBITDA margins in managed houses and EBITDA per pub within tenanted/leased pubs.
If cash is king, then control is crucial – From a pub group perspective, speed of
response to the turbulent trading conditions will remain vital in the ensuing months.
Hence, we advocate a preference for pub groups that exhibit strong direct
operational controls. During positive trading environments tenants tend to require
less guidance, whilst in recessionary times we believe that greater guidance from
senior management over sites will prove a major competitive advantage.
Debt levels need to be cut – We have reviewed the substantial debt positions being
nursed by the pub groups on an affordability basis. Our comparison takes account of
Net Debt/EBITDA, fixed charge cover and most importantly the use of operating cash
flows. Given the persistent downward trend in beer volumes, cash flow concerns are
unlikely to abate in the near term, with tenanted/leased estates likely to fare worse
due to greater dependency upon wet sales.
Our favoured tipples and likely hangovers – Whilst the quality of estate is
important, the ability to maintain this is even more vital in our opinion. To facilitate
the continuance of a high quality pub estate we suggest that the ability to respond
swiftly and effectively to ever changing trading conditions will be vital. We prefer
stocks that have strong operational control over the licensed premises within their
estate. Whilst managed houses provide a foundation for control, we have identified
other attributes, as discussed within, for determining the operators likely to perform
best in the coming year and beyond. Our favoured stocks are: Mitchells & Butlers –
BUY; Greene King – BUY; Fuller, Smith & Turner – BUY. We envisage more troubles
for: Punch Taverns – SELL; Enterprise Inns – SELL; Marston’s – REDUCE. Other stocks
covered: JD Wetherspoon – HOLD; Young & Co Brewery - HOLD.
Please see
Contents
Key Recommendations 3
Introduction 4
Sector in Numbers 6
Sector in Graphs 8
Pub Industry Background 10
Estate Quality 17
Crucial Control 22
Debt affordability 28
Looking for Balance & Sustainability 31
Valuations 33
Company Notes
• Enterprise Inns 39
• JD Wetherspoon 45
• Mitchells & Butlers 51
• Punch Taverns 57
Company Summary Sheets
• Enterprise Inns 64
• Fuller, Smith & Turner 65
• Greene King 66
• JD Wetherspoon 67
• Marston’s 68
• Mitchells & Butlers 69
• Punch Taverns 70
• Young & Co Brewery 71
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