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Pub politics hits Enterprise Inns

As Parliament sets about removing the beer tie, Enterprise Inns is readying itself for change
February 12, 2015

What's new:

■ Removal of beer tie to have a "significant impact"

■ First-quarter underlying growth of 0.3 per cent

■ Good Christmas trading

IC TIP: Hold at 110p

Back in November, MPs in the House of Commons tried to liberate publicans by passing an amendment to the Small Business, Enterprise and Employment Bill. A "market rent only" (MRO) option was inserted to the legislation that, if enacted, would abolish the 'beer tie' between big pub companies and their tenants. Tenants are currently obliged to purchase certain beers and other supplies from their landlord. Under MRO this so-called 'wet rent' would disappear.

Enterprise Inns (ETI) has one of the largest tenanted estates of any London-listed pub company. It has admitted that MRO would have a "significant impact" on its business. The group is therefore "reviewing" its capital investment plans for the current year. It still plans to spend £70m on its pub estate, but the focus will shift to shorter-term contracts to protect it from the changing regulatory environment. The spending will be part-funded by £60m of property disposals.

So far this year, trading has been solid, if unspectacular. In the 18 weeks ending 31 January, like-for-like net income from the leased and tenanted estates rose 0.3 per cent. The group enjoyed strong trading over Christmas, but that was offset by soft beer volumes in January.

Numis says...

Add. Enterprise Inn's like-for-like growth in net income reflects a number of self-help measures and estate improvements. However, MRO puts this progress at risk. Politicians are unlikely to soften their stance, in our view. The new rules are therefore likely to result in a material decline in support to tenants and capital expenditure. We think the most exciting option for shareholders would be the creation of a separate support-free Reit for all existing and future free-of-tie leases. We still expect pre-tax profit of £124m this year, giving EPS of 17.6p.

Deutsche Bank says...

Buy. First-quarter growth of 0.3 per cent marks the sixth continuous quarter of positive growth. That follows six years of consecutive declines. We believe MRO could cost Enterprise Inns around £50m, although the group has a number of options that could offset this. It could raise rents to make up for lost profit on beer, reduce its licensee support or end annual beer discounts. It could also reduce its head-office overheads or take back some pubs and convert them into the managed estate.