Enterprise Inns Share Discussion Threads

[mechanical trader] 20/11/2012 07:38

ETI ENTERPRISE INNS.


OUTLOOK



We complete the 2012 financial year in good shape, having made progress in many areas and having invested significant sums into the quality of our estate and our internal resources to ensure that we are well placed to tackle the continuing volatility and challenge of the current market.



We are confident that the quality of our pub estate, the flair and resilience of our publicans and the skills and commitment of our team will continue to deliver solid results, whatever the market conditions. We are now focused on returning the business to growth, through a number of initiatives that we believe will continue to generate significant cash flows which we will use to reduce our debts and deliver value for shareholders.





We intend to issue an Interim Management Statement on 31 January 2013.

[mechanical trader] 19/11/2012 19:23

From week ahead very bullish comment........

The same day will see preliminary results from Enterprise Inns (ETI).

Recent news: Like-for-like income in the total estate was down 1.2% for the 44 weeks to 4 August, implying a decline of just 0.6% in the last 18 weeks. Like-for-like income per pub in the substantive estate was up 1.6%, compared to 1.5% at the half-year. Year-to-date disposal proceeds stood at £148 million.

Analysts' expectations: Simon French, analyst at Panmure Gordon, is expecting trading in 2013 to remain "challenging", but believes the group should be able to stabilise like-for-like net income in the whole estate. He is predicting disposal proceeds of £150 million for 2013, with capital expenditure dropping to c. £50 million.

"Given the improving trading trends and falling bank debt - and the possibility of the reintroduction of dividends over the next 12 months - we think the stock continues to offer significant upside potential," states French, reiterating his 'buy' recommendation.

Valuation: The stock trades on a 2012 enterprise value (EV) to EBITDAR ratio of about nine times.

[mechanical trader] 19/11/2012 17:33

Results tomorrow morning.

[mechanical trader] 19/11/2012 16:13

ETI ENTERPRISE INNS

A forward P/E of just over 3
to 2013 Derd Cheap IMO.

Look at the NAV per share aswel.

Enterprise Inns PLC

FORECASTS 2012 2013
Date Rec Pre-tax (£) EPS (p) DPS (p) Pre-tax (£) EPS (p) DPS (p)

Panmure Gordon
16-11-12 BUY 135.00 20.10 133.00 20.10
Numis Securities Ltd
14-11-12 BUY 136.70 20.40 135.30 20.50
Shore Capital
09-11-12 SELL 137.00 20.30 140.00 20.70
Peel Hunt
28-08-12 HOLD 136.92 20.37 132.58 19.99
Charles Stanley
25-05-12 BUY

2012 2013
Pre-tax (£) EPS (p) DPS (p) Pre-tax (£) EPS (p) DPS (p)

Consensus 136.83 20.37 133.97 20.33
1 Month Change -0.43 -0.05 -2.04 -0.09
3 Month Change -0.47 -0.06 -1.94 -0.09


GROWTH
2011 (A) 2012 (E) 2013 (E)
Norm. EPS -5.24% 39.31% -0.17%
DPS % % %

INVESTMENT RATIOS
2011 (A) 2012 (E) 2013 (E)

EBITDA £248.00m £338.44m £327.28m
EBIT £234.00m £m £m
Dividend Yield % % %
Dividend Cover x x x
PER 4.50x 3.23x 3.23x
PEG -0.86f 0.08f -18.82f
Net Asset Value PS 199.22p 300.00p 321.00p

[mechanical trader] 19/11/2012 09:08

ETI ENTERPRISE INNS

Brokers with BUY recomendations on ETI

Date Company Name Broker Rec. Price Old target price New target price Notes

16 Nov Enterprise Inns PLC Morgan Stanley Equal weight 66.50 75.00 75.00 Reiterates
16 Nov Enterprise Inns PLC Numis Buy 66.50 110.00 110.00 Reiterates
16 Nov Enterprise Inns PLC Panmure Gordon Buy 66.50 87.00 87.00 Reiterates
15 Nov Enterprise Inns PLC Deutsche Bank Hold 66.50 105.00 105.00 Reiterates

[mechanical trader] 19/11/2012 08:46

From week ahead very bullish comment........

The same day will see preliminary results from Enterprise Inns (ETI).

Recent news: Like-for-like income in the total estate was down 1.2% for the 44 weeks to 4 August, implying a decline of just 0.6% in the last 18 weeks. Like-for-like income per pub in the substantive estate was up 1.6%, compared to 1.5% at the half-year. Year-to-date disposal proceeds stood at £148 million.

Analysts' expectations: Simon French, analyst at Panmure Gordon, is expecting trading in 2013 to remain "challenging", but believes the group should be able to stabilise like-for-like net income in the whole estate. He is predicting disposal proceeds of £150 million for 2013, with capital expenditure dropping to c. £50 million.

"Given the improving trading trends and falling bank debt - and the possibility of the reintroduction of dividends over the next 12 months - we think the stock continues to offer significant upside potential," states French, reiterating his 'buy' recommendation.

Valuation: The stock trades on a 2012 enterprise value (EV) to EBITDAR ratio of about nine times.

[jeffian] 17/10/2012 10:13

I would guess - and it is a guess - that it is a reaction to yesterday's figures from Spirit (formerly part of Punch Taverns / PUB) and particularly that they returned to the dividend lists. If that is the case, a note of caution; Spirit was the 'cream' of Punch incorporating the Managed Estate and the better leased pubs. It was also left with more manageable debt. The poorer tenanted pubs and most of the debt was left with PUB. It should also be noted that Spirit's leased estate is still struggling and they took quite a big write-down on the value of their property portfolio.

Having said that, it does seem that ETI have weathered the storm and stabilised their estate and they did say that by the end of the year (30 Sept) they would have paid off the 'Tranche B' bank debt which was the only loan to contain a covenant against paying a divi. Whether ETI feel sufficiently confident to follow Spirit will be revealed with the Preliminary Results due on 20 November but the market clearly feels there's a chance.

[inv] 17/10/2012 09:32

This is jumping. Should soon be around 100p

[inv] 17/10/2012 09:31

Very strong upwards movement here

[jeffian] 17/8/2012 16:26

scburbs,

Have a look at Note 23 on Pages 82-88 of the AR which gives you quite a lot of information.



I can't remember which presentation showed it but the answer to your question is that ETI have absolute flexibility to remove or inject assets into both the bonds and the securitisation and use that to ensure that they stay within covenant but with no need to offer more than they have to. There is a Quarterly Investors' report on the Unique estate (the securitisation) in which income and cashflows are shown in detail and tested against covenant, but I think you have to be an ETI shareholder with a password to access it.

[scburbs] 17/8/2012 10:20

Thanks Jeffian much appreciated. By any chance do you have the prospectus from the securitisation?

There hasn't been much focus on the covenants in the 2018 bonds, but given the property value is £1bn on £600m of bonds and the interest cover was disclosed as 2 they seem to be on the cusp of the covenant and will need to inject more assets if the valuation falls. I can't remember if they have already had to inject assets into this previously?

"If a professional valuation discloses that the value of the Specific Security
is less than one and two-thirds times the nominal amount of the Bonds and/or the Net Annual Income from the Specific Security is less than two times the gross annual interest on the Bonds, the Issuer will be obliged to charge property and/or money so that thereafter the value of the Specific Security is not less than one and two-thirds times the aggregate nominal amount of the Bonds and the Net Annual Income from the Specific Security is not less than two times the gross annual interest on the Bonds." P3 Value and Income Covenants.

[scburbs] 16/8/2012 14:01

Do any of the holders of the 2018 bond receive separate financial information on the bond? Most of the ETI info is focussed on the securitisation where the covenants need greater managing.

The only info I have seen on the 2018 bond is 60% LTV (£600m vs £1bn of property) and 2*interest cover.

[jeffian] 14/8/2012 23:55

S_n_S,

I don't understand your comment about "personalities" but if I've offended, I apologise.

"During a recession interest of whatever kind (early 1980s inflationary recession, 1990s exchange rate recession, dot com recession or Noughties property bust up recession) rates on commercial loans go up, late cycle inflation remains stubborn and credit is withdrawn and discretionary consumer spending generally dips."

Errm, isn't that what I said?
"jeffian 10 Aug'12 - 17:52 - 761 of 765 edit
....'Normal' recessions are a response to an overheating economy with consequent inflationary pressures being squeezed out by raising interest rates and dampening demand."

But you stop at the Noughties. How do you define the 2007/8 onwards recession? Zero interest rates, low inflation, no collapse in asset values or consumer spending, so what is causing the problem? The banking crisis and lack of liquidity. My point.

You say "Business models need to account for those risk....
(1. Credit contraction
2. Price of credit
3. Consumer slowdown)
.... and a clever executive team should scenario test their business model for those risks."

But they did! Around £2.7bn of their debt is in the form of long-term bonds or amortising securitised debt (not affected by "credit contraction") and all of their debt was hedged to fix interest rates at around 6.5% as far as the eye could see ("price of credit" controlled). Whilst not immune from the effects of "consumer slowdown", the rent+wholesale model provides some buffer between economic events and ETI's earnings which have declined from a peak of 39p over a number of years but seem to be stabilising at around 22p and still cash-generative. Compared to PUB (all but bust), MAB (nearly bust by its hedging shenanigans), MARS and GNK (both diluted by deeply discounted Rights Issues), the ETI executive team may reasonably feel that they've covered the risks rather better than most!

If you're not prepared to make a judgement on when/if "excessive" debt becomes reasonable, fair enough, but then how will you know when or if the share becomes a 'buy'?

[tiltonboy] 14/8/2012 13:44

Shrewd,

An excellent analysis of the situation.

I am a holder of the Bonds, and see this situation as being akin to the old split capital investment trusts, whereby the Bonds become the income shares, and the Ords assume the mantle of the Capital shares. Adding in the bank debt, gives financial liabilities of around £3bn, and with net assets of around £1.5bn, it is plain to see the effects of movements in book values.

I appreciate that it will take a circa 30% fall in asset values to wipe out the equity, but I will rest happier in the Bonds.

[shrewd_n_sharp] 14/8/2012 13:15

Sure, let's keep the personalities out of it and stick to a good discussion.

First of all I don't think I need to define of what the right amount is. There is no such thing as a "right amount". There is, however, such a thing as "excessive" and you don't need an exact measurement to prove that. However, empirical evidence show that equity dividends have been cut. That suggests the debt burden and interest on it was too close to the wire. Otherwise it could have adjusted to external conditions. I don't accept the arguments on EPITDA or "if this hadn't happened then it would be OK". To me, the fact is that the business model was too aggressive and did not have sufficient inbuilt caution like other companies to adjust to cyclical risks such as:

1. Credit contraction
2. Price of credit
3. Consumer slowdown

You make another point here.....

"Compared to most residential and commercial property funding, I would say that's not particularly racy."

Whilst the perfect myth is that it is a property play I feel in reality it's a little different in that first, the revenues are not as stable as property rents seen in the residential sector nor central London prime property. Secondly discertional consumer spending underpins the ability to service the lease costs. Finally, tax rates and commodity inflation of the final product also squeeze the bottom line. The struggling pubs are mainly due to a combination of the above three.

During a recession interest of whatever kind (early 1980s inflationary recession, 1990s exchange rate recession, dot com recession or Noughties property bust up recession) rates on commercial loans go up, late cycle inflation remains stubborn and credit is withdrawn and discretionary consumer spending generally dips. A weak pound can add to the inflationary-driven RPI/CPI squeeze on profits as well.

Business models need to account for those risk and a clever executive team should scenario test their business model for those risks. That this company has these issues suggests to me that this sceanrio testing was not rigourous enough.

[jeffian] 14/8/2012 10:56

But, like spob, you don't address my question. How do you define "too much" debt, what in your opinion would be the 'right' amount and why? ETI's debt is only "huge" as a number but its assets base is even 'huger'! Ignoring goodwill, its loans represent 65% of its property portfolio. Compared to most residential and commercial property funding, I would say that's not particularly racy.

I disagree with your analysis that ETI "saddled itself with huge debt based on the assumption of continued consumer spending growth". ETI isn't a consumer-facing business (at least, only indirectly). It took on the debt on the assumption that it was acquiring solid assets generating an income stream from rents and wholesale margins on beer. Yes, those income streams will eventually be affected by consumer spending, but spread over a period and in a manageable way. EBITDA peaked in 2006/7, then covering interest payments by 2.4x. After 5 years of decline, earnings now seem to have stabilised and the cover is 1.73x. Not great but not the end of the world, either. The dividend took a stiffing because the banks demanded it and isn't evidence of anything other than that everyone was running extremely scared at the time and not knowing whether the (economic) world as about to end. Many companies in which I am invested took precautionary cuts or waivers of dividends in that period that, with the benefit of hindsight, turned out to be partly or wholly unnecessary (TPK being a prime example).

Like you, I hold the bonds for income but potentially the larger gain in the long run will come from the equities where you can currently buy nearly £3 of value for 60p. That will only begin to be unlocked when the wider market, whose views you express, accepts that there is a sustainable business going forward and that ETI are on top of that debt. It's a fair question, therefore, to you and spob as the exponents of the "too much debt" case, to ask when you think that may be.

[shrewd_n_sharp] 13/8/2012 22:58

jeffian,

I have very good grasp of what happened thank you very much. My commentary about about the debt levels vis a vis recessions. My point on the banking crisis was that it wasn't the sole cause of the recession. We were due one anyway and any glance at the level of consumer debt will clearly tell you that a consumer credit and spending halt was way overdue. The banking crisis was only the amplification mechanism. It is probably best to understand the point someone is making before firing off on a misinterpretation. If unsure, do clarify first.

But Enterprise Inns itself has saddled itself with huge debt based on the assumption of continued consumer spending growth. These things are cyclical not linear. They should have modelled their finances to factor in a consumer slowdown at some point. That the equity dividends took a stiffing is ample evidence that the debt load was excessive. The bonds however, are very safe and I am comfortable on those.

[jeffian] 10/8/2012 17:52

btw, S_n_S, if you think "What happened in the banking sector" in 2007/8 onwards is "like in any recession" then you haven't grasped what is going on. 'Normal' recessions are a response to an overheating economy with consequent inflationary pressures being squeezed out by raising interest rates and dampening demand. There is no inflation, demand is low and interest rates are next to zero, because the 2007/8 crisis was purely a banking crisis in which banks refused to lend to each other because they mistrusted the quality of 'assets' on their balance sheets and liquidity dried up. As banks only lend on a 3-5 year cycle, this has been a bugbear for ETI (which has now been through 2 bank facility renewals during the crisis) as the market has questioned each time not whether they can 'afford' the loans but whether the banks will be prepared (or able!) to renew them at all. This is the reason they have focused on reducing relatively cheap bank debt when they probably would have preferred to buy back their more expensive bonds at a discounted rate and why they have recently, at some cost, entered into the latest Forward Start Facility (an undertaking from the banks that new facilities will be available when the old ones expire), just to show that they can.

[jeffian] 10/8/2012 15:45

The question, S_n_S, which spob has been avoiding is 'what is "too much"'? ETI have managed to avoid having a dilutive Rights Issue (unlike several more highly-rated peers such as MARS and GNK) and is still profitable and cash-generative, albeit profits are down from the peak of 2007/8. ETI's debt is both affordable and manageable. The corporate bonds and securitised debt are not the issue; what frightened the markets was the bank debt (then £1bn) which could obviously not be repaid 'on demand' (who can?!) at a time when the banks looked as if they may have to call in all their loans, so I contend that the banks ARE the problem. PUB did "borrow too much" because it found that, despite a Rights Issue, it was still unable to service its debt and fell foul of its bond covenants. That hasn't happened to ETI and they've gone out of their way over the past couple of years to demonstrate how they are dealing with it and why that won't happen to them. spob has an antipathy to debt - any debt - but to the rest of us (and I repeat the analogy of the domestic mortgage), how would you define "too much" debt and what would you consider the 'right' level of debt to be?

[shrewd_n_sharp] 10/8/2012 12:20

jeffian,

I would say it's the board borrowing too much that caused the problem here. What happened in the banking sector just exposed companies who are borrowing too aggressively, like in any recession. I too have been holding the 2018 bonds since March.