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More outs than ins at Enterprise

SHARE TIP: Enterprise Inns (ETI)
March 15, 2012

Pubs operators have faced miserable trading these past four years. But the pain has been most acute at run-of-the-mill boozers in anonymous locations, not high-quality establishments in prime locations such as The Mayfly in Hampshire. Located in beautiful country side overlooking the River Test, this pub pulls in walkers and cyclists visiting Iron Age forts at Danebury, Stockbridge Down and Chilbolton Down. Given such a great location, it's no surprise the pub's online reviews suggest it rarely struggles for custom. When times are tough, this is the type of establishment pubs operators dream of having in their estate.

IC TIP: Sell at 53p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • Some operational successes
  • Disposals should help bank refinancing
Bear points
  • Selling its best pubs
  • Trading outlook poor
  • Debt still too high
  • Long-term refinancing issues

So it has to be a worry that The Mayfy and 15 other quality pubs comprise a batch that Enterprise Inns has just sold to Fuller, Smith & Turner. After all, when a pubs operator is struggling for custom, why sell the best pubs? True, the City responded positively to news that Enterprise is selling its prime boozers, but that's because the proceeds – £25.4m in the case of the sale to Fullers – will ease concerns about the impending refinancing of £420m of debt.

This particular loan comes due at the end of 2013, but Enterprise's bosses are likely to try to sort out the borrowings issue this year. They say that, after identifying a number of "exceptional" pubs that should fetch very good prices, they expect to raise between £150m and £200m this year and next from disposals. The disposals should also help Enterprise avoid a cash trap next year on one of its bond issues – a situation that arises when trading deteriorates below a stipulated level, prompting cash flow to be ring-fenced for bondholders.

ENTERPRISE INNS (ETI)
ORD PRICE:53pMARKET VALUE:£268m
TOUCH:53-54p12-MONTH HIGH/LOW:98p26p
DIVIDEND YIELD:nilPE RATIO:3
NET ASSET VALUE:276pNET DEBT:214%

Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200888020936.816.2
2009818111.2nil
2010758-315.2nil
2011711-144.8nil
2012*67213519.7nil
% change-5 –

*Peel Hunt's underlying forecasts

Normal market size: 40,000

Matched bargain trading Beta: 1.5

However, the disposals also undermine's Enterprise's potential. Selling underperforming pubs has already seen the group's revenue growth slowly ground down, yet the sale of top-end pubs could leave less still for shareholders in the long run. And financing concerns go beyond the forthcoming issue of bank debt. There is a £60m bond repayment scheduled for 2014 and £600m due in 2018. So the pressure to sell assets won't go away.

Admittedly, management deserves credit for the success of its Beacon-pub improvement plan, but revenue figures being reported aren't much cause for celebration. Indeed, the 1 per cent rise in like-for-like net income per pub in the 18 weeks to 4 February from pubs on good leases – the so-called substantive estate – has to be set against the hit that Enterprise took from the appalling weather the year before. According to broker Peel Hunt, once this is factored in, underlying like-for-likes were actually down by about 1 per cent. This is some improvement on the 2 per cent deterioration in the previous year, but it is nevertheless negative.

And there are serious trading challenges in the year ahead, too, as consumers' disposable income falls, and costs and taxes for publicans rise. The effect of London's summer Olympics and the Diamond Jubilee should be helpful. Even so, 2012 promises to be challenging.