Enterprise Inns Share Discussion Threads

[the_doctor] 25/8/2011 17:03

I dont expect that to happen jeffian, but it's not like shareholders are too attached to this stock!
Furthermore, if it would be so bad selling the company at 55p/share, then the co. buying back at 40p would be a godo deal

scburbs, I think once they've completed the remaining sales.. and perhaps with a bit more debt pay off through operating cash flows, the interest will be both manageable and as discussed earlier, also well covered

Personally, with assets valued at over £1bn more than liabilities, I'd be all for them selling all of the pubs if they could realise that value!
It would make ETI worth 5x the current share price in cash
(not that they're going to do that though)

[scburbs] 25/8/2011 16:55

Thanks Cerrito. Given the gearing I would be in favour of them selling rather more than planned. It seems a bit premature to be drawing the disposal programme to a close!

However, if they can use the trend towards increased food sales to restart EBITDA growth (rather than continual falls) then the debt:EBITDA ratio should start to normalise through growth rather than disposals.

"The provision of food in our pubs continues to grow in importance as the overall quality of the estate improves and we estimate that food now accounts for approaching 25% of pub turnover across the estate. The nature of the business model is such that improvements in performance take time to feed through into like for like growth in net income, but we are pleased that many key indicators suggest that we are moving in the right direction. In particular, having seen significant declines over the past two years, our total rent roll (net of concessions) has remained stable for the past five months.

Our strategy remains clear: to stabilise the business and then to build EBITDA, firstly on a like for like basis per pub and then, as our accelerated disposal programme comes to an end, by growing the absolute level of EBITDA."

[jeffian] 25/8/2011 16:48

55p? I sincerely hope they couldn't!

[the_doctor] 25/8/2011 15:58

Is there scope for this being taken over by private equity?
They could get it for £300m probably

[cerrito] 25/8/2011 15:26

scburbs
see following from last interims
£47 million raised from disposal of unsustainable pubs



We have continued our disposal programme during the first half of this year, selling poorer quality and potentially unviable pubs which do not fit the future profile of the business. During the period we sold 212 pubs, together with other property assets for a net consideration of £47 million. We expect to sell in the region of 500 pubs in the full year, by the end of which our accelerated disposal programme will be substantially complete and we will return to a lower rate of estate churn.

The reason they have been able to sell at above book is presumably because they over provisioned
Some pubs would have been sold for residential but we have no figures

They have not told us geographic breakdown of pubs sold; note in six months to March 11, 45% of the income and 42% of the pubs in the South; comparative figures for the midlands were 25% AND 27% and the North 30% and 31%. We do not appear to have been given comparable figures for earlier years.

[the_doctor] 25/8/2011 15:21

Well, I wouldnt like to test that, but in any case, interest payments will be reduced by the bank debt being paid off.

While drinking in pubs is declining, many pubs do offer a cheap dinner vs other restaurants. So, I expect trade to continue reasonably well regardless

Perhaps a turnaround here will rest on the Nov statement
If they say that as planned, total bank debt will be down to £450m, trading flat and asset values flat... plus something like a dividend again, then that should help a lot IMO?

[jeffian] 25/8/2011 14:58

doc,

ETI have operated for years on the basis of interest being about 2x covered by EBITDA. As at the interims, the cover was 1.74x and it would take a 42.5% decline in income before interest payment were not covered. ETI's income is under threat from falling rents, reduced beer volumes going through the pubs and reduced wholesale margins on that beer, but I doubt it'll ever get to the stage that they can't pay the interest.

[scburbs] 25/8/2011 13:17

Travelodge in the market for pubs.

"Travelodge is thought to be in discussions with pub firms about buying properties to turn into small hotels.

...

While it is not clear which firms Travelodge is talking to, several major pub firms including Punch and Enterprise Inns, as well as Mitchells and Butlers, have been actively divesting parts of their estates for the last several years."

[the_doctor] 25/8/2011 12:33

The biggest threat as I see it, is of income falling below interest payments

However payment of the bank debt will reduce these requirements, giving greater room above interest levels

After the first tranche being paid off, there's approx £80m cash being generated per year, as well as £30m capital investment
They could take something like at least a 20% knock to revenue and still cover the interest requirements

[the_doctor] 25/8/2011 12:13

but they did that at high prices jeffian

buying back £100m shares at this level would double EPS going forward (for example)

if we think they're going to be able to return to higher earnings, then that would IMO be a better use of cash than buying the bonds for returns

[jeffian] 25/8/2011 12:11

Please no! They've already bought/cancelled nearly 150m shares since 2006/7, and that's got us where, exactly?!

[the_doctor] 25/8/2011 11:35

Good points - I guess it's chicken and egg. Bank debt is the biggest threat, so they need to pay that down first... but once they have, the bonds wont be priced so attractively
It's crazy to think they were buying back so many shares at that level!
Sadder still to think that whoever approved it would have been paid large sums too.

'they just get smaller but the relative gearing remains unchanged'
yes, but paying off the bank debt is perhaps the main requirement

At these prices, they should perhaps consider buying back shares BEFORE any dividend?
£50m spent on buybacks could massively help long-term EPS and share price performance

[scburbs] 25/8/2011 11:33

I have acquired an initial position here this morning as the risk/reward looks very attractive, albeit the risk is undoubtably high! I like the long term covenant lite nature of the non-bank facilities which ameliorates a degree of the risk at least until 2018.

Hopefully they are selling the cr@p pubs and doing sale and leasebacks with the better pubs to retain the operating performance.

Clearly the debt reduction from the sale and leaseback is somewhat illusory due to the lease rental obligation replacing interest, but sensible if they are keeping pubs with strong operating performance.

I would appreciate any longer term holders here who could help my research on the quality of the pubs which they have been selling. What evidence is available as to which pubs they have been selling? How have they managed to make a profit over book by selling the worst pubs? Do they have significant alternative uses, primarily resi conversion? Have they been selling pubs in the worse performing North region or the better performing South region?

[jeffian] 25/8/2011 11:22

That's about the size of it, doc. Their frustration of the past few years has been that the banking/liquidity crisis has forced them to put all available cash into reducing bank debt, which is relatively cheap, when they could have been buying back their own bonds for as little as 40p in the £ (equivalent to an annual roc of 16.25%!). Once the bank debt is stabilised or removed, I'm sure that that will still be part of their strategy to achieve eps growth. Mind you, serves 'em right for not listening to me at the AGM a few years ago when I argued against share-buybacks as a method of 'returning cash to shareholders'. They subsequently spent nearly £1 BILLION(!) buying back their own shares at up to £8 (and look where they are today!). If they'd paid it out in cash we'd have had several £'s/share in our pockets now or if they'd used it to pay down debt we probably wouldn't have been in this mess in the first place!

The pub sales will have to come to a stop at some stage as it is a vicious cycle; yes, debt goes down, but so does income. In the early days, they were selling the cr@p pubs which were either closed or producing little income so the disposals did not affect their income too badly, but if they start selling 'core' pubs, they just get smaller but the relative gearing remains unchanged.

[the_doctor] 25/8/2011 10:24

Thanks jeffian
Good point re £450m, I overlooked that.
The implication of only £30m left at the end of the financial year, is considerably better than my assumption of Tranche B gone by mid 2012.
Is that right, by end Sept 2011, the bank debt will be down to just £450m?

Personally I'd prefer them to adopt a strategy of a) paying it down b) investing and c) a modest dividend
However, it's interesting to hear that Tuppen may leave it at that level/convert to fixed-rate.
My view is that the market would be more comfortable with lower debt one way or another, so this should be an aim.

without a dividend, £70m cash generated per year from Oct 2011 onwards, would allow them to pay off about £160m by end 2013.
ie. bank debt down to about £290m
Any disposals over those 27 months would also reduce that further

With the business struggling, IMO paying off debt would be a great use of cash.
Lower interest payments would make the business more robust in the event of a double dip AND if they paid down debt, there would be more scope for borrowing a bit more if they really had to.

Essentially, they should remove concerns of them going bust.

My reason to buy is that when they stop paying off bank debt, they should be sat generating considerable cash flows
£70m per year from a business valued at £200m!?

[jeffian] 24/8/2011 18:44

doc,

Tranche B, which has a covenant against the payment of dividends whilst it exists, is due for repayment by the end of 2012 but they say they intend to pay it off early. This from the Interims -

"The new facility comprises tranche A, £419 million which expires in December 2013 and tranche B, £206 million which expires in December 2012. On 16 May 2011, after allowing for appropriate headroom, £48 million of tranche B was not required and was therefore immediately cancelled. There are certain restrictions on returning cash to shareholders whilst tranche B is in place, for which reason we will apply all cash available for repayment of bank borrowings to tranche B until it is fully repaid and cancelled, which we expect to be well in advance of its expiry date."

In the IMS on 4 August they said -
"the level of our bank borrowings is on track to be around £450 million by the end of the financial year."

Taking the point made by fjgusto in #495, the implication, therefore, is that only around £30m will remain outstanding in Tranche B at the year-end (£450m total minus £419m Tranche A).

They may go on reducing bank debt thereafter but I know (from listening to the analysts' presentation after the Interims) that Ted Tuppen feels that £400/£450m bank debt is sustainable and would like to leave it at that level if the banks are willing (or able, given the continuing risk of another liquidity crisis!). If not, they can either go on reducing bank debt from revenues, as you mention, or they could replace it with more fixed-rate borrowings (corporate bonds) although there would be an interest rate penalty in the short term (current bank rate vs. bond rates).

The key to all this, as you rightly say, is that trading has to be at least flat (i.e. they need to stabilise the fall in earnings of the past few years) at which point I believe that they will try to reinstate some sort of dividend which would at least underpin the shares and offer some rationale to buy, which is sorely missing at the moment!

[spob] 24/8/2011 16:54

multibag in which direction ?

[the_doctor] 24/8/2011 16:37

Erm... double bottom??

FTSE up 100pts again and ETI slumping - a real shame given the performance last week.

jeffian
any thoughts on how challenging it will be to pay off Tranche A by end 2013?
They make about £70m per year excluding disposals,

So, if they pay off Tranche B by mid 2012
then over the subsequent 18 months, they'd make about £100m
That would reduce Tranche A to £319m
(I'm not allowing for the reduction in interest payments as the debt is paid off)

They'd therefore need to keep up disposals of over £300m between mid 2012 and end 2013 to pay off Tranche B
They generated £270m from disposals in 2010, but 2011-12 could be quite a bit more challenging

The above is all assuming that trading conditions stay around flat.
I'd guess that if they have to, they could cover say £100m of Tranch B with a further loan or an extension?

IF they can pay off the bank loans by end 2013, then at the current rate, they could be paying about £22m less interest per year.
They'd also not have to dispose of any more pubs OR disposals could pay off the bonds or give dividends, but they'd be generating £200m free cash flow per year

ie. this has potential to multibag IF they can just stick to current trading

[jeffian] 22/8/2011 17:24

Aye. Well they're not alone there, are they, doc?!

[the_doctor] 22/8/2011 09:56

A few good days in the markets and this could break above 50p IMO

The former part of that is probably the bigger hurdle though!

[the_doctor] 18/8/2011 07:46

Thanks all.
That rather highlights the degree of manipulation attepted by the fined analyst in Jan 2011 then IMO - it's surprising the market fell for it and the share price jumped back then!

With property prices still high, selling off the pubs isnt a bad plan
It would be interesting to know how much the assets could be worth if ETI actually modified its business model and took a more active role in converting pubs in to new housing developments.
Depends on what the homes would sell for... and what the yields would be
I have no idea about either vs the values for the pubs

[jeffian] 17/8/2011 22:56

I think the REIT thing is a non-starter and, although the Board professed themselves to be interested in theory, I think this was largely to satisfy pressure from advisers (fees!) and the market. The last reference to it was on 12/5/09 when they said "ETI should be able to become a REIT at some time in the future if the Board considers it to be in the best interests of shareholders". The answer to part of the_doc's question is that they do have HMR&C approval to re-structure the company to achieve REIT status but the issues for the company are that
a) that involves a (costly?) re-structuring
b) there is an immediate cash impact as a result of a 2% charge on asset value in lieu of CGT and
c) the obligation to distribute 90% of all net profit as dividends restricts their options going forward.

[cerrito] 17/8/2011 22:29

The doctor your 509
To be honest had forgotten all about it and I assume they have had other things to worry about...indeed not even sure if it will be much of a benefit but have not focused on this
Price of the 2018 bonds has fallen over the last week and are currently at 77/79.5 giving one a double digit yield. As they are secured on the pubs seems a good deal to me.

[the_doctor] 17/8/2011 14:41

There was 15% stock on loan in July
15% in June
13.6% in May
19% in April
17% in March
16% in Feb

Easy money with a 5% holder dumping the lot!

Still, now that's done, there's potentially still quite a lot of short interest to close.
Given the stock lending costs, I dont see there being much point them holding on.