Pubs op­er­a­tor EI looks very ap­peal­ing for drinkers and in­vestors

We out­line po­ten­tial cat­a­lysts to drive sig­nif­i­cant value at the busi­ness pre­vi­ously called En­ter­prise Inns

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We are con­fi­dent that the UK’s largest pub com­pany EI Group (EIG) is mak­ing good progress with its trans­for­ma­tional strat­egy and is on the verge of gen­er­at­ing sig­nif­i­cant value for share­hold­ers.

With a port­fo­lio of 4,500 pubs, EI has re­cently en­joyed a surge in its share price, up 134% from its near-three year low of 72.9p in Fe­bru­ary 2016.

EI is ar­guably in a sweet spot with its wet-led fo­cus as pubs are cur­rently re­port­ing much stronger de­mand for drinks rather than food.

Beren­berg an­a­lyst Owen Shirley says EI trades on a dis­count of around 50% to net as­set value (NAV) which is ‘too big to ig­nore’. As of 31 March, NAV was £1.52bn com­pared to the £795m mar­ket cap.

EI had a hard time dur­ing the fi­nan­cial cri­sis of 2007-2008 as it strug­gled with very high lev­els of debt.

Shirley says EI’s in­vest­ment in its pub es­tate has driven re­turns on in­vest­ment, a mea­sure of how prof­itable an in­vest­ment is, to over 20%. A fig­ure of over 15% is gen­er­ally seen as de­sir­able.

The an­a­lyst ar­gues its de­ci­sion to sell the Com­mer­cial

Prop­er­ties port­fo­lio could gen­er­ate £300m to pay down debt, trig­ger a re-rat­ing closer to NAV and po­ten­tially lead to a spe­cial div­i­dend.

‘Through a com­bi­na­tion of dis­pos­als and free cash gen­er­a­tion, the com­pany should delever­age at a rate of over £100m per year, which could drive a ma­te­rial debt to eq­uity shift,’ com­ments Shirley.

The bulk of EI’s pubs (3,856) fall un­der Publi­can Part­ner­ships where the ten­ant pays a dis­counted rent but is ob­li­gated to buy beer from the group.

Un­der the Com­mer­cial Prop­er­ties di­vi­sion are 351 in­de­pen­dent pubs that pay rent to EI un­der a lease that gen­er­ally lasts be­tween 10 to 20 years.

In 2015, the strat­egy changed from run­ning pubs at arms’ length by tied ten­ants with changes oc­cur­ring in the Man­aged Op­er­a­tions and Man­aged In­vest­ments di­vi­sions with a to­tal of 319 pubs.

In Man­aged Op­er­a­tions, pubs are now op­er­ated via The Ber­mond­sey Pub Com­pany and Craft Union.

Craft Union fo­cuses on sell­ing drinks in com­mu­nity pubs and is sim­i­lar to a fran­chise model. These pubs are led by self­em­ployed op­er­a­tors tak­ing re­spon­si­bil­ity for or­gan­is­ing and pay­ing staff while re­ceiv­ing 18% of sales.

Man­aged In­vest­ments in­volves EI leas­ing an es­tate with ‘sig­nif­i­cant up­side po­ten­tial’ to a part­ner with eq­uity typ­i­cally split 70% and 30% with EI tra­di­tion­ally tak­ing the lion’s share.

Liberum an­a­lyst Joe Brent is op­ti­mistic the pub group can more rapidly delever­age and un­der­take dis­pos­als as trad­ing has im­proved across the board. (LMJ)

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