Enterprise Inns Share Discussion Threads

[spob] 13/7/2011 15:51

No guarantee of a turn or of a bottom forming for ETI

It wont take much consumer belt tightening to wipe out the equity here.

Imho

[jeffian] 13/7/2011 15:31

SalmonID,

""a closed pub with no prospect of re-opening is not worth £0"
Is that really how some are treated on the books?
If that is true, it would decrease my concern about ETI's asset values."

No, that's not how they are treated in the books - the estate is valued annually on a house-by-house basis - but the analysts' report I saw which queried the values did so on the basis that it took total EBITDA, applied a multiple to produce a capital figure and then divided the result by the total number of pubs which really doesn't tell you much given the spread of properties from £multi-million London pubs to back-street boozers in Glossop and such an approach effectively values closed pubs at nil (EBITDA £0 X any multiple = £0).

I tend to agree with you that one day the market will think these are cheap but, in the meantime, what the bottom will be or when they will turn, I have no idea. My guess would be the trigger will be the reinstatement of a divi, which some believe could be at the 2012 Interims if they have repaid 'Tranche B' bank debt by the year-end as planned, but who knows?

[the_doctor] 13/7/2011 13:42

Salmon - I'm not sure what all brokers have as targets, but UBS was upgraded to neutral 80p, Credit Suisse cut to 144p, Panmure Buy 110p
I may take a punt near 50p, but I'm put off by the fact that wider market collapse from these still high index levels could hit ETI down further.
You want to get into something with real growth potential, such as PRM IMO ;o)

[salmonid] 13/7/2011 13:11

In January 2009, ETI issued the following IMS:


Although the share price had already dropped from a high of 775p down to 65p over the preceding 18-24months and then stabilised, it then nearly halved again after the IMS.

As much as I'm turning to the view that this could be cheap, the impact of the IMS in January 2009 shows how much cheaper the stock could get.
Reading through the IMS, it is not a lot different from something ETI could put out in its next statement.
2008-09 were unusual years though and ETI is now in low performance mode, so the shocks should be less?

[salmonid] 13/7/2011 12:29

jeffian

"The 6.5x EBITDA relates to the specific pubs they have offered as security against the bank facility. ETI have the facility to move assets around so they will have picked properties which meet the criteria but if covenants are too tight, they will simply swap the secured assets for others which fit the bill."

I didn't come across that in my initial research. That is very interesting, thanks. No wonder the reported EBITDA figures don't fit.
If ETI had already picked the highest EBITDA pubs, would they be allowed to add more, rather than simply swap?
In other words, are you confident that ETI could find other assets that fit the bill?

Regarding NAV wipe out, looking at the numbers, I would agree that there is some room there. So, if the assets were downgraded, the share price would be hit, but the market capitalisation already somewhat allows for it and could handle it.

"a closed pub with no prospect of re-opening is not worth £0"
Is that really how some are treated on the books?
If that is true, it would decrease my concern about ETI's asset values.

As the share price falls, I'm moving over from being more in the anti camp, to the pro camp. The potential to pick up shares on the cheap is what attracted me to ETI.
Based on the NAV, debt repayments, cash flows and corresponding metrics for peers, where do you see this hitting a floor out of interest?
There must be a point where even if trading or asset valuations suffer a bit, the shares will firmly be cheap.
Do you have any idea what the lowest broker price targets are?

[jeffian] 11/7/2011 16:13

The trouble is, Cerrito, there's not much to support the share price here at the moment. Both GNK and MARS have had their Rights Issues, returned to growth and are paying a divi (albeit from a lower base) while PUB at least has a 'story to tell' by splitting itself into separate leased and tenanted businesses (not that that excites me much!). ETI meanwhile did its shareholders a favour by avoiding the dilution which would have come with a Rights Issue but at the price that all available spare cash has gone to paying down debt so at the moment we have a business which is struggling to stabilise earnings, prevented from paying a divi and without any obvious way of unlocking the underlying NAV in the short term. Not a compelling investment case!

[cerrito] 11/7/2011 13:10

anyone know what is going on today??
I see PUB,JDE and GKN a bit weaker but nothing like here and Mars up a bit stronger

[jeffian] 08/7/2011 16:20

SalmonID,

The covenant that is bothering you only relates to the Bank Debt, which is likely to be down to £450m (out of total net debt around £3bn) by the end of the year. The 6.5x EBITDA relates to the specific pubs they have offered as security against the bank facility. ETI have the facility to move assets around so they will have picked properties which meet the criteria but if covenants are too tight, they will simply swap the secured assets for others which fit the bill.

Re: values, the argument is that if pubs are valued on a multiple of earnings (only partly true), continued downward pressure on rents, beer volumes and the wholesale margin on beer will result in downward valuation of the pubs themselves. It would require something in the order of a 30% downward valuation of assets across the board to wipe out the stated NAV. You have to make your own judgement about how likely that is. Almost all pub sales over the past few years have been at or above BV but this is probably a reflection of 2 things - firstly, they have sold some of the 'Crown Jewels' at very high prices supported by highly-rented leasebacks and, secondly, many of the poorer pubs sold have already been written down. Having said that, many analysts poring over spreadsheets in a darkened room seem to overlook the fact that property has an underlying value regardless of trade and a closed pub with no prospect of re-opening is not worth £0! Here in West London where I live, where even the most humble dwelling seems to have a £m price-tag, I have seen several ETI 'backstreet' pubs close and be sold and they have gone as flats/shops/restaurants at quite fancy prices. (Mind you, the other side of that coin is that they've probably got a few in Welsh ex-mining towns where you can buy a terraced cottage for a few £k!).

Finally, ETI did disclose the covenant against dividends at the results presentation. It is specific to 'Tranche B' of the bank debt which they say that they intend to pay off early, probably by the end of the year, and the implication is that they will be free to pay some sort of divi starting next year if appropriate. More important, though, is for them to show they have stabilised earnings. The 'anti's' think they will continue to suffer death by a thousand small cuts; the 'pro's' think that if earnings can be stabilised, there is a point at which the shares will look cheap. It's hard to argue that point has arrived yet, as the market reminds us daily!

[utterberk] 08/7/2011 16:02

Can't believe BG are hiking their prices by 16% for the gas and electric. That's 4 fewer booze-ups a year for me to make up the difference.

[spob] 08/7/2011 12:42

No offense intended but really no need to get fixated on the minutiae here.

In this situation there is enough info to reach a sensible conclusion.

[salmonid] 08/7/2011 12:35

I must say, I'm not sure exactly how net debt and EBITDA go to work out the ratio. The numbers I've been using don't match up.
Jeffian, would this be due to the valuation adjustment?

I have been reading up on comments about the covenants.
A Panmure Gordon analyst seems to think that the assets are overvalued. He suggests that ETI may have to downgrade the asset valuations.
This would worsen the net debt:EBITDA ratio

Is it right that the recent pub sales were about at the book value?
If ETI feels they could be getting too close to the covenant limit, then they could try to sell more pubs. Could this strategy be dangerous though? If the sale values were below book value, then they would have to write down the assets. Panmure seems to think that the slowdown in the economic recovery will force the independent assessors to downgrade the assets.

At the moment, 5.75x is not far from the 6.50x threshold. It wouldnt take a lot to breach that covenant.
It isnt only about net debt, as the EBITDA side could worsen too. With more pubs sold off and cost pressures, EBITDA may fall short.
Does anyone have any good reasons why 5.75x shouldnt be seen as uncomfortably close. This was the March 2011 number, so things will have changed.
Paying off debt will help ease the net debt side.

Some other articles/comments suggest that ETI has not disclosed all of the covenant details, such as limitations on the dividend payment. At this stage, I don't think anyone should be too hopeful of a dividend, so as long as there are not any important gaps in what was disclosed, that should not be a problem.

[the_doctor] 06/7/2011 18:18

Great stuff Salmon - you've saved me having to dig!

Some good points raised - pro and con

I do think this is probably at a fair valuation, and long-term could produce solid gains from here if they plod along paying off debt and derisking
BUT, that's set against a scene where any further deterioration and they could start to struggle. Well- they'd be able to pay off interest, but the debt repayment schedule might could fall behind.
At least they're ahead for now... and will remain so until any deterioration.

I'd agree that the net debt:EBITDA at 5.75x versus a covenant limit of 6.50 looks a bit tight!?
Not got time to look into it right now though, sorry.

[jeffian] 06/7/2011 11:24

Which "facts" are those, spob? Most companies - and people, come to that - have debt; it's either affordable or unaffordable. You are presumably saying it's the latter in this case but I'd like you to explain why.

[spob] 06/7/2011 11:18

sorry, but please face facts folks

[jazza] 06/7/2011 11:15

Give it a rest spob.


jeffian, always appreciate your posts - thanks.

Just had my first proper look at the interim results, seems they have £158m of Tranche B debt to shift by 12/2012 which should be completed early given their cashflows. That, along with repayment of some floating rate bonds then gives them a break until the fixed-rate bonds repayments start. Tranche A needs refinancing in 2013, by which time "debt-balls" so enthuastically adopted by spob here, will be less of an issue for the markets, given that most sovereign deficits will have been sorted one way or another.

[jeffian] 06/7/2011 11:14

I think that's called 'evading the question'!

[jeffian] 06/7/2011 11:11

jeffian - 21 Oct'10 - 10:15 - 408 of 467 edit

Ah, spob, as you're back on one of your rare visits, you forgot to answer this one -

"jeffian - 20 Jul'10 - 18:01 - 369 of 407 edit


Well what do you think is the "right" level of debt and why?

If you were buying a house (or pub!), how much of the purchase price would you be prepared to borrow?"

[spob] 06/7/2011 11:06

Salmon good post

as long as you realise what you are investing in

a massive scary debt with a very small company attached :)

[jeffian] 06/7/2011 10:46

That's quite a thorough look, SalmonID!

2 comments for you.

1) "The slides show the net income margin has dropped a bit from 61.2% to 59.8% in H1 2011. "impacted by increased discounts"
I haven't been to the pubs to see if the discounting has stopped."
The "discounting" they are referring to is not in the pubs themselves but in the wholesale price of beer which Enterprise supplies to its tenants, so you won't see anything by visiting the pubs. ETI do not run any pubs themselves; they simply let them to a tenant who pays them rent and is obliged to buy beer (and sometimes, wines, spirits and other supplies) at wholesale price. They may also take a share of gaming machine income. Because their buying-power across 7000-odd pubs is so huge, ETI are able to extract massive discounts from the brewers which they do not pass on in full to their tenants, pocketing the difference. The 'tie' (the legal requirement in the lease that they can only buy from their landlord) has been under attack for years by tenants who see that they could buy their beer cheaper from a local wholesaler and there is currently (another!) Parliamentary enquiry into it. This pressure has resulted in the pubco's passing on more of their discounts to the tenants and this is what the comment above refers to.

2) "At a 2010 PE ratio of 12.73, this isnt really cheap". No, it would be pretty fully-valued for a pubco. But you have used the "Basic" eps of 5.2p eps which includes a substantial (£225m) non-cash valuation adjustment. "Adjusted" eps (i.e. underlying earnings with the valuation adjustment stripped out) were 25.8p giving an underlying PER of 2.56x

[salmonid] 06/7/2011 10:19

I have just been reading through a few past posts here to see what people think

This is on my watchlist to buy

It is amazing to think that the current share price could be covered with just four years of the old 2008 dividend!

Is this dropping due to fears of the debt level?
According to ADVFN, total debt has dropped significantly over the last few years, but so have total assets.

The May presentation says
"Strong cash generation has reduced net debt by £175m in six months"
but "£138m proceeds from disposals"
Would these disposals be exceptionals, or would debt without disposals only have reduced by £37m?

The slides show the net income margin has dropped a bit from 61.2% to 59.8% in H1 2011. "impacted by increased discounts"
I haven't been to the pubs to see if the discounting has stopped.

Looking at the geography of the pubs, the midlands and north were a drag on performance in H1 2011. From news in these areas and house price drops, I dont imagine there will be a recovery just yet?

At a 2010 PE ratio of 12.73, this isnt really cheap compared to say Vodafone or GSK that offer nice dividends, generate cash sustainably and have little in the way of debt worries.

the_doctor. Did you manage to look at the covenants?
I'm encouraged by what the presentation says
"Tranche B - £206m expires December 2012, £48m already cancelled"
This would suggest they're on track to cover the bank debt by Dec 2012, if the trading remains as is.

"Tranche A - £419m expires December 2013"
If that's right about Tranche B, then they'll also be ok for A.
and the company says this
"Repayment and cancellation of Tranche B planned well in advance of expiry date"

Here are the covenants


Net debt at end March 2011 was 3130
Net assets of 1477
EBITDA for 6 months to then was 179
I can't quite see how the EBITDA:net debt ratio is worked out?
Anyone know what exact numbers it relates to?
The company says the covenants are well covered, but at 5.75x versus a limit of 6.50x, EBITDA would only have to drop by about 12% to hit that?
With the disposals and increasing costs, is that a risk?
At the same time, net debt reducing will help though.
Have any of you guys looked at this?

The other aspects look well covered, as are the corporate bonds.


Enterprise has over £1 billion net asset value. That's what drew me to look more closely at the company.
Against that though, what is going to improve the company's performance at the moment? It seems unlikely that earnings will rise and there is a real risk of recessionary pressure hitting that down. I'm not too sure what I should be looking at, but the EBITDA:net debt component of the bank covenants is my biggest worry.
What do people think?

[the_doctor] 30/6/2011 00:51

interesting comments, thanks

I'll have a dig if this is all described by the co

[jeffian] 29/6/2011 20:07

Me too. ETI have some of the lightest covenants it is possible to have and they also have great flexibility (e.g. they can move secured assets in and out of bonds and replace them with alternative assets of appropriate value). It is not an issue.

[cerrito] 29/6/2011 19:20

the_doctor
from the information given in their interim presentation I am comfortable about covenant cover

[the_doctor] 29/6/2011 17:50

My mistake there jeffian actually, sorry.
I've not looked at the figures for some while and was confusing with some other set of financials
I was wrongly thinking that ETI's operating cash flows were a much smaller proportion of revenue and therefore more at risk of being compressed

So yes, I'd agree with your views actually.


Any thoughts about at what point covenants could be breached?