Managed Pubs With Money to Invest to Surpass Rivals

(Corrects in 13th paragraph to show Punch reported first- half loss in April.)

JD Wetherspoon Plc (JDW), which operates more than 750 pubs, Marston’s Plc (MARS), which runs the Pitcher & Piano chain, and Greene King Plc (GNK) will continue to show share price gains this year, driven by their refurbishment programs and food sales, analysts say.

The laggards will be heavily indebted companies with large tenanted pub holdings such as Punch Taverns Plc and Enterprise Inns Plc (ETI), according to analysts including Jeffrey Harwood at Oriel Securities. Enterprise has lost 35 percent in London trading this year. Punch has fallen 1.4 percent so far this year. Fuller Smith & Turner Plc has risen 6 percent and Greene King 3 percent. The FTSE 100 index has fallen less than 1 percent during the same period.

“Going forward, food is the growth area in the market,” Harwood said in a phone interview. “Food-led brands should continue to outperform. Greene King is in a strong position to expand. The more wet-led pubs will find life more difficult.”

More than 1 billion meals were served in U.K. pubs last year, beating the total number of meals served in restaurants, according to the British Beer & Pub Association. Beer sales fell 7.5 percent in 2010. Pubs are trying to offset the impact of weaker consumer demand and discounted alcohol at supermarkets by offering customers cheap meals.

Food accounts for 41 percent of revenue at Marston’s, the company said May 19. At Greene King, food sales are forecast to reach about 40 percent of revenue for the year, the company said in April.

Food Factor

“We started without too much debt,” Wetherspoon Chairman Tim Martin said in a phone interview. “Food is vital. Food accounts for 30 percent of revenue, it’s grown over the past 20 years from 5 percent. We have been more innovative, opening for breakfasts and so on.”

Enterprise Inns, the U.K.’s second-biggest pub owner, wasn’t able to provide a figure for food sales.

“We work closely with our publicans,” a spokesman for Enterprise said in an e-mailed statement. “We encourage and provide support to publicans who wish to carry a food offering.”

Managed-pub companies with cash to invest on modernizing their pub portfolio will also do better than their indebted rivals, said analysts. Managed outlets in Britain are run by managers that work for a pub chain. Landlords of tenanted pubs rent the building and its fixtures from a pub company or brewer.

“The likes of Greene King, Mitchells & Butlers have got the balance sheet to spend money on their estate,” Alistair MacDonald, an analyst at Espirito Santo Investment Bank, said in an interview. “They should outperform. There is no doubt that a lick of paint and a refurbishment can help pub performance.”

Debt Burden

Greene King had net debt of 1.3 billion pounds ($2.1 billion) compared with earnings before interest, taxes, depreciation and amortization of 135.4 million pounds, according to Bloomberg data, based on the company’s latest six-month results. Wetherspoon has net debt of 406.1 million compared with Ebitda of 71.1 million pounds and Marston’s has net debt of 1.1 billion pounds compared with Ebitda of 86.8 million pounds, the data show.

In December, Greene King said profit for the six months ended October 17 rose 38 percent to 51.9 million pounds. In May Marston’s posted a 46 percent rise in first-half net income to 30.3 million pounds. In March, Wetherspoon said first-half profit fell 9 percent on rising costs, even as sales grew.

Punch Taverns Plc (PUB), which plans to split in two as it tries to sell about half of its 6,000 tenanted pubs to dispose of unprofitable outlets and reduce debt, has net debt of 3.2 billion pounds compared to Ebitda of 203.9 million pounds. Punch said in April it had a first-half loss of 324.8 million pounds.

Punch Demerger

Punch said today that sales at its managed pubs open for at least a year rose 7.3 percent in the 12 weeks ending May 28, while net income at its tenanted estate fell 3.3 percent. The company said it is making “good progress” with its demerger plan.

Punch rose 6.5 percent to 74.5 pence in London trading as of 9:06 a.m., the biggest gain since March 24. Chief Executive Officer Ian Dyson said in a call with reporters today that while the economy is ‘fragile’ the company is “benefiting from a business that is low ticket.”

“Given the company has disappointed so much in the past it is encouraging to see both businesses moving forward in the right direction,” said Sanjeet Aujla, an analyst at Credit Suisse Group AG in London.

Enterprise Inns

Enterprise Inns, which reduced debt by 175 million pounds, has net debt of 3.1 billion pounds compared to Ebitda of 179 million pounds. Enterprise said on May 17 that first half profit fell 13 percent to 71 million pounds as sales slipped and it reduced the number of pubs in its portfolio. The company plans to sell about 500 pubs in the full year.

“There is an awful lot of debt in those businesses,” said Nick Batram, an analyst at Peel Hunt. “Big tenanted chains have issues. The tenanted model has come under pressure over the last few years. Punch is trying to break itself in two. Enterprise is in a program of reducing a high level of debt.”

Fuller Smith & Turner (FSTA) Plc, the owner of Gales pubs in southern England, is scheduled to report full-year results on June 10. The company is likely to at least match the like-for- like sales growth of 8.8 percent in the seven weeks to June 3 achieved by Young & Co. Brewery’s managed estate, said analysts at Peel Hunt in a note issued June 6.

Enterprise Inns fell 0.6 percent in London trading to 76.55 pence as of 8:57 a.m. Marston’s fell 1 pence to 104.5 pence, Wetherspoon slipped 0.8 pence to 438.2 pence and Greene King declined 0.24 percent to 493.5 pence.

To contact the reporter on this story: Colm Heatley in London at cheatley@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net

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