Enterprise Inns Share Discussion Threads

[shrewd_n_sharp] 06/12/2012 19:05

lol!! The resident Enterpriser returns. Seasonal greetings jeffian. Are you a pure equity holder or do you hold credit also out of interest?

[jeffian] 06/12/2012 14:50

"We see 2013 as the year when the equity holders reap most of the upside in the market value."

And about bleedin' time, too!

[muscletrade] 06/12/2012 09:59

Mechanical.... I think you might find that the DB upgrade happened on 3rd December.
Keep an eye open for any change to Peel Hunt position. They last made recommendation in June.which is a lifetime ago.
Good Luck.

[mechanical trader] 06/12/2012 09:17

ETI ENTERPRISE INNS.....

Elsewhere Enterprise Inns rose 4p to 90p after Deutsche Bank moved from hold to buy and raised its price target from 105p to 135p. The bank said:


During 2012, the group's corporate and securitised bond holders saw the market value of their investment rise by around £340m while the equity investors have managed less than half of that. Even after this year's run, the share price remains 35% below the levels of April 2010, when the group was in poorer shape. We see 2013 as the year when the equity holders reap most of the upside in the market value.


Since the pub group's results on 20 November, its shares have risen around 35%.

[mechanical trader] 06/12/2012 09:17

ETI ENTERPRISE INNS.....

Elsewhere Enterprise Inns rose 4p to 90p after Deutsche Bank moved from hold to buy and raised its price target from 105p to 135p. The bank said:


During 2012, the group's corporate and securitised bond holders saw the market value of their investment rise by around £340m while the equity investors have managed less than half of that. Even after this year's run, the share price remains 35% below the levels of April 2010, when the group was in poorer shape. We see 2013 as the year when the equity holders reap most of the upside in the market value.


Since the pub group's results on 20 November, its shares have risen around 35%.

[mechanical trader] 05/12/2012 10:43

05 Dec Enterprise Inns PLC ETI Numis Buy 90.75 90.50 110.00 110.00 Reiterates

SP TARGET 110p.

[mechanical trader] 05/12/2012 10:39

05 Dec Enterprise Inns PLC ETI Numis Buy 90.75 90.50 110.00 110.00 Reiterates

SP TARGET 110p.

[shrewd_n_sharp] 03/12/2012 15:23

mt - yes 2016 was a typo. I meant 2018. As for the 2021, 2025 and 2031 I am not excited about them either but they do have implications for the covenant headroom on the bonds.

Something that I cannot gauge from the annual report nor the accounts is how close these covenants are and how much spare headroom there is on the estate for additional security. All they are saying is that they are "sufficient". But they have said that for three years now without further detail being disclosed. With the persistent selloff of the estate pubs the income and asset values are slowly being eroded and so even if the covenants are in place, how much headroom is there left for error in say three years? The more you sell the less the headroom gets if you need to add more should the covenants be breached. We cannot possibly tell as it stands. That is what I would like to find out.

Now initially all these bonds had "x" amount of pubs secured against them. The figures in the 2018 prospectus gave these figures on the other bonds:

Original No. of pubs secured by 2018 bonds 503
Original No. of pubs secured by 2014 debentures 306
Original No. of pubs secured by 2021 corporate bonds 384
Original No. of pubs secured by 2025 corporate bonds 574
Original No. of pubs secured by 2031 corporate bonds 838

TOTAL 2,605 ACROSS ALL BONDS

In the 2010 annual report it says that the "amount of pubs secured pubs by bonds & debentures" were 2076. But in 2011 this fell to 2049. My interpretation here is that the 2,605 pubs that were reported as secured when the 2018 bond was issued have now been eaten into and sold off. On the face of it this is fine for two reasons:

1. Property values have escalated since the bonds were issued

2. The prospectus (at least the 2018 bond) permits this in Section 9. which allows the deeds / first fixed charge to be released providing income and asset value covenants are not breached

But how close are they? My current numbers tell me that about 19% of trading pubs are unsecured, meaning they can add from this pool if the covenants are broken. In three years time @5% estate sell off a year the pool comes down to about 4% spare headroom. Now they are suddenly close and without knowing the revenue cover and asset cover values of the other bonds it is difficult to tell where we are. In addition consider that if all bonds & debentures have the same covenants of asset cover and income cover then theoretically it is possible to aggregate these and see how much headroom there is left from total revenues and total asset value of the estate.

Maybe all is well and maybe I am overcautious but that is what bond investors do! I am just trying to bottom out the facts. Has anyone else looked into this?

[muscletrade] 03/12/2012 15:02

Shrewd....have you asked ETI themselves?

In your note above you mention 2106 bonds....I only see 2014 and 2018 maturity, no 2016.
Company have already said that they will either pay off 2104 from cash or extend maturity.(it is only £60m).It is 2108 that is the main event at £600m but that is 6 years away.
I cannot get excited about 2012, 2025, and 2031 right now and sums are not that massive(125, 125 and 275m respectively) and could easily be paid off early anyway...or am I being stupid.

[shrewd_n_sharp] 03/12/2012 12:26

I don't question the logic from DB. Revenues from trading will be falling as they have, and still are, selling off the estate at a rate of between 5% and 8% a year. Total Revenues have been falling at a rate of mainly 5-8% as well, in line with estate selloffs. Trading profits from property selloffs have limited the impact of the pain and it has now stabilised. On that I agree with DB.

Having done a full cashflow and balance sheet analysis I can see that the concern isn't P & L analysis and difference between yields and cost of capital but the debt maturity profile and potential hit on cash levels a few years ahead. The profile is lumpy to say the least. This has been a known risk for a few years now, as the annual reports clearly show. The board have not finished yet with estate sales to address this. Their annual report preliminaries tell us that over the next three years they intend to continue to flog off the equivalent of 5% of the estate a year to raise the cash to pay off the bank debts, at a rate of around £150m a year. This is what will raise the net profits if anything along with less writedowns on the portfolio value. The Beacon concept has been mooted as a potential saviour (3pp pubs max) but barely accounts for 5% of the estate so even if it shows better GP margins it will not have much of a profit effect overall in my view. What is impressive is their booking of profits on the book value of properties sold off. Out of the last six years they have booked profits on that, with four of those year hitting double digits % margins on those book values.

I expect Gross Revenues for next year to be slightly down. I expect £20m less on the estate value writeoffs. I expect £160m of selloffs at book value at £185m of market price, booking about £25m trading profit. I expect profits to be up slightly to around £55m.

They then hope to renegotiate the 2014 debentures and 2016 bonds further out. That will be interesting. The 2018 bonds have covenants that state that:

1. Secured income must be 2 * bond interest
2. Secured asset values must be 1.66 the bond value

QUESTION: Does anyone know if the same covenants as the 2018 bonds apply to these? Does anyone know where I can find the prospectuses for them?

Corp. Bonds (Debentures) 2014
Corporate Bonds 2021
Corporate Bonds 2025
Corporate Bonds 2031

[mechanical trader] 03/12/2012 11:05

ETI ENTERPRISE INNS


Interesting to find Numis also
have a share price target over 100p.

110p share price Target.

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

03 Dec Enterprise Inns PLC Deutsche Bank Buy 90.13 105.00 135.00 Upgrades
16 Nov Enterprise Inns PLC Numis Buy 90.13 110.00 110.00 Reiterates

NORWICH & PETERBOROUGH BUILDING SOCIETY

It will be interesting to see if more
analysts upgrade or downgrade over the
next few days.

[mechanical trader] 03/12/2012 10:46

ETI ENTERPRISE INNS


03 Dec Enterprise Inns PLC ETI Deutsche Bank Buy 91.13 86.00 105.00 135.00 Upgrades

SP TARGET 135p

0737 GMT (Dow Jones] Deutsche Bank upgrades Enterprise Inns (ETI.LN) to buy from hold and target to 135p from 105p. Says stability in trading is now clearly visible. Even though Deutsche Bank forecasts FY 2013 pretax profit to be down a modest amount, looks for +0.5% growth in like-for-like net income, followed by +1% for FY 2014 and FY 2015. Says, "Over the next three years, we see lost profit from disposals being offset by lower net finance charges and the ability to reinvest around two-thirds of capex for growth as opposed to pure defence of the past five years." Shares closed at 86p Friday. ([e-mail] Twitter: @ATryphonides)

[muscletrade] 03/12/2012 09:58

Jeffian, ok doke. thanks. I agree that the DB note is hardly crystal clear, but it has to sound complicated(when it is quite straightforward really) to justify their hard work I suppose.

[jeffian] 03/12/2012 09:52

muscletrade,
I agree with everything you say! Don't get me wrong, I'm (very) long here. I just question the reasoning given by DB.

[muscletrade] 03/12/2012 09:38

Perhaps the bottom line is not the most important thing at the moment.
It is the bank debt (even though it is the cheapest)that can cause the most problems with it's potentially dangerous covenants. Remove the bank debt and these covenants disappear, The bond covenants are far less onerous and easily managed.
Jeffian, while I respect and understand what you are saying, while you are arguing your point the share price and the bond price continues to improve as the market recognises that this company is not going out of business, it has hard assets(that we can see and touch) and that there is value here. Quite how that value is realised remains to be seen but sooner or later that value will be appreciated.

[jeffian] 03/12/2012 09:25

I'm slightly surprised by the reasoning ("we see lost profit from disposals being offset by lower net finance charges"). The mixture of bank loans, corporate bonds, securitised debt and interest rate swaps effectively fixes the cost of ETI's debt at around 6.75%. Because of the uncertainties around bank finance generally, the focus is on paying off the bank debt altogether (around £300m = about 2 years' disposals), but this is the cheapest debt. The average ROC across the whole estate is about 9.5% (Net income per pub divided by average value) so it's hard to see how repaying debt costing 3.5% by selling assets yielding 9.5% will help the bottom line.

I was involved in this game for years and it was easy to see how the model worked during the acquisitive phase as every pub bought yielded significantly more than the cost of capital. Logic says it's the reverse on the way down!

[mechanical trader] 03/12/2012 09:05

CR late to the party as usual.

[cockneyrebel] 03/12/2012 07:40

0737 GMT [Dow Jones] Deutsche Bank upgrades Enterprise Inns (ETI.LN) to buy from hold and target to 135p from 105p. Says stability in trading is now clearly visible. Even though Deutsche Bank forecasts FY 2013 pretax profit to be down a modest amount, looks for +0.5% growth in like-for-like net income, followed by +1% for FY 2014 and FY 2015. Says, "Over the next three years, we see lost profit from disposals being offset by lower net finance charges and the ability to reinvest around two-thirds of capex for growth as opposed to pure defence of the past five years." Shares closed at 86p Friday. ([e-mail] Twitter: @ATryphonides)

[cockneyrebel] 03/12/2012 07:13

Raised to buy from hold at D.Bank - you heard it here first :-)

CR

[mechanical trader] 27/11/2012 10:23

Going nicely again today after
a couple of down days.

[jeffian] 26/11/2012 14:08

Thanks, mt. At least he uses the term "Enterprise Value" in his speech, even though the slide calls it "Market Value", but I still think the concept is flawed.

Incidentally, the final line reads -

"if we can deliver growth in EBITDA or earnings per share, then [a] re-rating might help to push the total enterprise value towards [our true Balance Sheet valuation]"

We wish.

[mechanical trader] 26/11/2012 12:45

transcript from their earnings call -

"And shareholders, this has been quite a journey back from the dark days of 2008, when dividends ceased and the share
price collapsed by 95%. On the positive side, you'll see that we've kept your net asset value intact for the past four
years. Somewhere just £3 a share although EPS is pretty well halved. Now is the time to deliver like-for-like income
growth and EPS growth and to rebuild confidence in our business model and our asset value. Now in terms of
delivering shareholder value, I just want to deal with a couple of fairly obvious points and bear with me because you all
understand this even better then I do.
Firstly as you can see from the two blocks on the left, our net asset value is £1.4 billion or around to a £2.85 a share.
We traded 65p, a discount of 75% Net Asset Value. If you prefer on a total assets basis, the market believe that our
public estate over valued by about 27%. Clearly there is something for us to address there.
Secondly looking at the cash generation chart at the top of the page excluding disposals and CapEx, which in steady
state would pretty well offset each other, we generated net-cash of around 100 million last year. On an entirely
hypothetical basis let's now look at value creation over the next three years. Let's ignore disposals or at least assume
that they will generate cash proceeds broadly inline with net book value. Let's ignore dividends, if we pay dividends the
money goes to shareholders anyway.
Let's ignore the immaterial cash impact of like-for-like growth or decline or the purchase of debtor to discount, this is
not a forecast, it's not a financial module, it's a theoretical representation of the future. If we use our 100 million of cash
generation to pay down debt.
All things being equal and our enterprise value remaining the same, the mathematics demonstrate that the value of our
equity will double over the next three years and IRR of just under 30%
If confidence in our balance sheet improves, if debt ratios are deemed to be less of a risk, if we can deliver growth in
EBITDA or earnings per share, then the re-rating might help to push the total enterprise value towards"

[mechanical trader] 26/11/2012 12:45

transcript from their earnings call -

"And shareholders, this has been quite a journey back from the dark days of 2008, when dividends ceased and the share
price collapsed by 95%. On the positive side, you'll see that we've kept your net asset value intact for the past four
years. Somewhere just £3 a share although EPS is pretty well halved. Now is the time to deliver like-for-like income
growth and EPS growth and to rebuild confidence in our business model and our asset value. Now in terms of
delivering shareholder value, I just want to deal with a couple of fairly obvious points and bear with me because you all
understand this even better then I do.
Firstly as you can see from the two blocks on the left, our net asset value is £1.4 billion or around to a £2.85 a share.
We traded 65p, a discount of 75% Net Asset Value. If you prefer on a total assets basis, the market believe that our
public estate over valued by about 27%. Clearly there is something for us to address there.
Secondly looking at the cash generation chart at the top of the page excluding disposals and CapEx, which in steady
state would pretty well offset each other, we generated net-cash of around 100 million last year. On an entirely
hypothetical basis let's now look at value creation over the next three years. Let's ignore disposals or at least assume
that they will generate cash proceeds broadly inline with net book value. Let's ignore dividends, if we pay dividends the
money goes to shareholders anyway.
Let's ignore the immaterial cash impact of like-for-like growth or decline or the purchase of debtor to discount, this is
not a forecast, it's not a financial module, it's a theoretical representation of the future. If we use our 100 million of cash
generation to pay down debt.
All things being equal and our enterprise value remaining the same, the mathematics demonstrate that the value of our
equity will double over the next three years and IRR of just under 30%
If confidence in our balance sheet improves, if debt ratios are deemed to be less of a risk, if we can deliver growth in
EBITDA or earnings per share, then the re-rating might help to push the total enterprise value towards"

[mechanical trader] 23/11/2012 11:40

ETI ENTERPRISE INNS

ETI - from Numis Note 6 Nov:

"Plans to pay off almost all bank debt should generate attractive equity upside, in
addition to a possible further re-rating if investment and improving asset/licensee
quality leads to LFL net income growth in 2013E, as management expects. As a
result, we are increasing our target price to 110p from 100p."

[mechanical trader] 23/11/2012 07:57

Looking for another good day.