Enterprise Inns Share Discussion Threads

[scburbs] 09/9/2011 10:30

Tiltonboy,

If you had a spare $5bn kicking around you could get both a priority ranking debt return and a highly geared equity kicker!

[scburbs] 09/9/2011 10:27

ETI is very highly geared (hence the very low share price), although if you want eyewatering gearing post the demerger Punch has £2.65m of property assets and £2.45m of borrowings (net of its cash). An impressively risky 93% LTV compared to ETI's 65%. It would be nice to see ETI get comfortably below 60% though.

[tiltonboy] 09/9/2011 10:22

Key is whether they can roll-over debt at a rate of interest that isn't prohibitive.

The equity here is a call option on the survival of the business. Highly geared and could be very rewarding, but I will stick to the debt.

[scburbs] 09/9/2011 10:21

They are not intending to generate cashflow to repay the 2018 debt they are planning on raising new debt. At 60% LTV that should be achievable, although if the £1bn valuation falls then it would become harder.

"The £1,185 million corporate bonds are non-amortising, are secured on ring fenced portfolios of freehold pubs and attract an interest rate averaging 6.5%, with the next scheduled maturities being £60 million in February 2014 and £600 million in December 2018. We will repay the £60 million 2014 bond from cash flow and expect to refinance the £600 million 2018 bond on maturity, bearing in mind that it will always be secured on a portfolio of pubs with an up-to-date valuation of £1 billion and interest cover of two times."

[the_doctor] 09/9/2011 10:17

... Hmmm... Looking back at the cash flow statement

Op cash flows for H1 2011 were £162m vs £172m for 2010

For H1 2012, this could be down 10%, to approx £146m

Interest payment was £97m
Plus, there was £37m of long-term loans paid off
(there's a holiday from this in 2012 fortunately!)
That's £134m

Paying off Tranche B will reduce interest payments by approx £4m?
So, down to £130m
BUT, they also spent £30m on improvements
That gives £160m spent in the period
[ALL excluding cash from sales]

They'll be fine for 2012, but in 2013, the long-term loan repayment resumes.
If Op cash flows reduce further to say £136m, there will be very little room.
Even with zero spending on improvements, they'll literally JUST be able to cover debt/interest payments. That will leave NOTHING for paying down Tranche A

I'd previously been missing the mandatory repayment of long-term loans!
Sure, I've been a little bit aggressive with trading assumptions, but still.
IMO they really have to continue to sell off pubs.
The debt/interest payment levels are worryingly high.

[tiltonboy] 09/9/2011 10:17

doc,

A relatively modest decline in turnover, or in margins, can make a huge difference to the bottom line. I suppose the market is taking the view that cash is going to be taken out of the business to repay maturing debt, which puts the 2018 repayment in jeopardy.

Perhaps there is also scepticism on the value of the pub estate, and the debentures that supposedly underpin the Bonds.

[scburbs] 09/9/2011 10:12

Thanks Tiltonboy.

If I were running ETI, starting to acquire the 2018 notes at a discount would be very attractive. Much less attractive to acquire the 20 year notes as you still need to find the money to take out the 2018 debt. I assume the 20 year notes would have a bigger discount so this would need to be considered if the 20 year notes are really cheap.

It would be interesting to see how much volume they could acquire before the discount disappeared. Perhaps they should launch a £100m offer at 80% and see what sort of take up they get. Put a few more pubs into the disposal package to finance it so they can still pay of the B tranche of bank debt in 2012.

[the_doctor] 09/9/2011 10:00

'The £1,466 million of securitised bonds amortise over 20 years, attract
a fixed interest rate of 6.3% and are secured on pub assets with a
net book value of £2,246 million'

that should be pretty safe??

[the_doctor] 09/9/2011 09:52

any thoughts why the ETI debt is trading at such a discount given how well debt is (currently) covered by assets?

presumably the bank debt sits above it in the creditor rankings?
So, I guess that removes a lot of the comfort zone?

[tiltonboy] 09/9/2011 09:45

scburbs,

The ETI 6.5% 2018 is trading around 73, giving a yield to maturity of over 12%.

There are a few interesting fixed interest stocks around. I bought some Matalan 9.625% 2017 for a GRY of 18.5% (40% if called at first date). I know most things consumer related are not having the best of times, but would hope the likes of ETI and Matalan will be among the survivors.

[the_doctor] 09/9/2011 09:22

tilton, well yeah, it's obvious that with the share price at such a low, then the debt would also be poorly rated

what's odd IMO is that the debt is secured against assets
So... for the debt to be so cheap, then the market must think that ETI wont be able to service the interest payments before or wont be able to refinance the 2018+ bonds... that ETI will go bust.... AND that even then, the assets that are currently valued at more than £1bn over the debt, wont cover it!?

If the bonds are say £3bn
and the assets valued at £4bn
with the bonds trading at a 75% discount, they're priced at sy £2.25bn
Which means that the assets could be sold off at close to HALF of the current valuations and bond holders would still get ALL of their money back!
[the numbers arent exact there, but you get the point]


Any views on how the market can be that fearful of the bonds?
Am I missing something??

The first tranche of bank debt is no issue at all.
With that paid off WELL ahead of schedule, the only issues then are
- paying off the second tranche
- covering interest on the bonds

Now, it could be that they've been trying to sell 500 properties and the ones we've seen sold are only the low-hanging fruit.
Selling others could require significant discounts, impacting the asset valuations. The assets are though valued quarterly and with ETI and PUB selling off quite a few, it should be much easier to work out realistic valuations.

It was said by some that ETI has over-valued the assets, on the basis that it can sell them in blocks - this may not now be realistic, so potential for a shock in valuations I suppose?


IF the company is right, then there'll be £450m bank debt by end of the financial year (I presume this means end Sept 2011 not end March 2012!? - can anyone confirm?)

One key challenge is that they'd still 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 2011-13 could be quite a bit more challenging
Instead though, I expect they'll switch Tranche B for a new bank debt, or possibly even shift it to bonds.
I've allowed for some deterioration in revenues by not reducing interest payments following payment of the first bank debt.
One problem is that they're coming to the end of their non-core pub sales and the sale & leaseback arrangements. So, after that, ETI will be largely reliant upon operating cash flows.
Personally, I'd like them to continue selling off assets until they can bring debt down a bit further to levels that the market's less worried about. Paying down the 2nd bank loan would reduce interest costs significantly

Now..... that would further impact revenue and income
PLUS, conditions may deteriorate, so we could see a drop in cash flow of say 5%?
BUT, crucially, by paying off the bank debt, interest payments will be about 22% lower. That therefore gives them quite a bit of room for error.
They could also delay capital investment in property refurbishment etc.

My plan is to buy a few more in a month or so, but I'll aim to check through all of the above more thoroughly first!
Essentially, running an estimated stress test, ETI still seems ok!?


Looking forward, I'm hopeful that the first tranche will be repaid roughly within the timeframe suggested. That could hugely reduce debt concerns
... that trading will remain roughly flat or only a small decline...
... that ETI may then pay a small dividend - a 3% yield at these prices would only cost them £5m per year

[scburbs] 09/9/2011 09:02

Tiltonboy,

What is the pricing? Whilst the discount might represent a warning sign it would also represent a huge opportunity for the equity. If ETI can buy their debt at a big discount there is no better use of any liquid resources.

[tiltonboy] 08/9/2011 17:04

Big slugs of ETI debt on offer at a big discount to it's par value, so a few warning signs for the equity.

[the_doctor] 08/9/2011 16:32

strong FTSE finish and this ends down

either someone has to bail out for other reasons (possible), or they expect ETI to issue a profits warning?!

[the_doctor] 08/9/2011 08:25

'What's to buy at the moment?'

well, if it'll be 100p when the divi is reinstated, then what's to buy is a cheap entry at the value later when people do see what's to buy

I tend to agree, although at this rate of decline, if the market does expect a divi to be hinted at in Nov, or reinstated next year, then at lower prices, others might just think about buying a few

13.1% on loan for Aug
down from 14.9% in July

so, it would look like shorters are closing

[jeffian] 08/9/2011 00:32

As ever, it's a question of timing, doc.

8-)

The downside is that profits are static at best and still falling slightly at worst and they're not allowed to pay a div until Tranche B bank debt is repaid. What's to buy at the moment?

The other side of the equation is that they're not going to go bust, they are still profitable and generate cash and it's likely that their assets will cover their liabilities even if there are further write-downs of the estate.

One day, the market will say 'these are too cheap', but when? I think the signal will be the restoration of a divi, however nominal. I can't see that until the current year's Finals at the earliest (given that they will not have repaid all of Tranche B this year), but they may give a signal in the 2011 results announcement on 22/11.

[the_doctor] 07/9/2011 18:48

Good stuff jeffian

It's one of those situations where I'm thinking, 'what are we missing'
- it looks safe from going bust
- if things remain on track or even somewhat below, the company will be back generating strong cash flows

Perhaps the potential for asset value collapse is a concern, but ETI's assets are still over £1bn covering liabilities

[jeffian] 07/9/2011 17:49

doc,
from the Interims (re the corporate bonds)
"...the next scheduled maturities being £60 million in February 2014 and £600 million in December 2018. We will repay the £60 million 2014 bond from cash flow and expect to refinance the £600 million 2018 bond on maturity, bearing in mind that it will always be secured on a portfolio of pubs with an up-to-date valuation of £1 billion and interest cover of two times."

The securitised bonds amortise over 20 years and they are currently £77m ahead of planned repayment.

Even if revenues remain under pressure, the nature of their income (rent+ wholesale margin) means it is unlikely to collapse overnight so whatever the final eps figure this year, the current share price is bound to be less than 2x earnings which is not a very demanding valuation!

[the_doctor] 07/9/2011 16:53

still hard to say when there'll be any bottom here!

If they say in nov that they're still on track to virtually have paid off the first bank tranche
that income hasnt really deteriorated and that pub sales have continued as planned...

then they'll be in a good position really IMO

jeffian - am I right that the bonds wont need refinancing for years - something like 2018?
if so, then once the bank debt is taken care of... and with interest cover good, this could be a nice turnaround stock

[the_doctor] 02/9/2011 16:47

well, that was a bad day for ETI stock

[the_doctor] 02/9/2011 15:18

This usually drops when it hits the 25 day EMA

But at some point, it'll be too cheap to realistically do so.
That said, could see 30p if it doesnt break upwards

perhaps 30p... then a rally in Nov
I'll be buying a few more

[the_doctor] 31/8/2011 09:44

well, I do think 60p is attainable
... and more if the co. remains on track with 2011 targets

[the_doctor] 25/8/2011 18:03

jeffian
company management dont do more proactive things like that sadly

I guess that if they can stabilise earnings, then grow them and pay an increasing dividend, the share price should recover without having to sell off the assets.

[scburbs] 25/8/2011 17:36

the_doctor,

Yes, you've read my mind it is making that £1+bn a little bit more certain and less risky is exactly what I am after (particularly as someone entering at the current price!).

Excluding intangibles the net assets in ETI and MAB are very similar at £1.1bn, yet MAB has a market cap of c.£900m and ETI c.£200m! ETI's debt:asset ratio is 60% whereas MAB's is 67% and it would be nice to see MAB's head towards 60% and below. I don't think the disposal programme will achieve that, although it might get it below 65%.

The businesses are not directly comparable as they operate different business models and MAB is much more food based and has stabilised its EBITDA, but the valuation differential against assets is pretty eye watering.

The EV/EBITDA gives a better idea of why MAB has a higher market cap. ETI has an EV of c. £3.4bn and MAB is £3.2bn. Using an annualised last 6 months EBITDA (MAB £388m/ETI £358m) the EV/EBITDA ratios are 9.5 ETI and 8.25 MAB. On this basis MAB looks a lot better value and indicates that ETI do need to stablise EBITDA and start driving better returns. The Debt/EBITDA ratios indicate how much more geared than MAB, ETI really is (not truly reflected in the 7% asset differential).

In reality you need to look at both measures together. MAB is clearly much lower risk due to its lower gearing and its better EBITDA performance. However, ETI has much greater upside as if an EV/EBITDA of 12 was appropriate then the equity value of ETI would skyrocket relative to MAB.

[jeffian] 25/8/2011 17:29

"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)"

Well you say that, doc, but why not?! That's exactly the proposition I put to the Board at the last AGM - that the shareholders had uniquely borne the pain of the last 2 years in the form of trashed share price and no dividends, so unless they could see a way of getting the share price back towards NAV, they may as well sell the lot and return the cash to shareholders!