22 Mar 2016 07:01
22 March 2016
Enterprise Inns plc
Capital Markets Event - Trading update
Enterprise Inns plc (ETI) publishes a trading update for the 25 weeks to 19 March 2016 and an update on the progress made on its strategic plan ahead of its Capital Markets Event being held, in London, at 2.00 pm today.
Highlights
· Like-for-like net income growth of 1.5% in the leased and tenanted estate in the 25 weeks to 19 March 2016.
· Implementation of strategy progressing at pace;
o Reinvigoration of our leased and tenanted estate continues with the planned launch of a new deal for publicans, the Enterprise Premium Tenancy, which will reduce property obligations and enhance capital investment;
o Rapid expansion of our quality commercial property portfolio. We now have 245 commercial properties with an annualised average rental income of £58,000 per site;
o 60 managed pubs now trading under various formats; and
o A new managed expert partnership announced with Laine Pub Group.
· Initiating a new share buyback programme of up to £25 million (circa 6%) of the issued share capital of ETI.
Simon Townsend, Chief Executive Officer, commented:
"It is close to a year since we announced our new strategic plan for the business and we are making good progress. Our leased and tenanted business, Enterprise Publican Partnerships, continues to deliver like-for-like net income growth and the expansion of our managed operations and commercial property portfolio is on track.
We are confident that the delivery of our strategy will provide a clear path to maximising shareholder value and are today outlining a returns-based approach to the allocation of available capital. The announcement of a share buyback programme demonstrates our approach and underlines our confidence. We remain on track to meet our expectations for the full financial year and look forward to outlining the progress we have made in more detail later today."
Enquiries:
Tulchan Communications, Jonathan Sibun/Peter Hewer 0207 353 4200
Simon Townsend, Chief Executive Officer 0121 733 7700
Neil Smith, Chief Financial Officer 0121 733 7700
The capital markets event presentation will be available on the company website at www.enterpriseinns.com.
Forward-looking statements This announcement contains certain statements about the future outlook for ETI. Although we believe our expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.
Trading performance and strategic progress
The continuing implementation of our strategic plan means that we are evolving from a predominantly leased and tenanted operation to a portfolio of businesses which operate a variety of models and trading styles.
Enterprise Publican Partnerships
Enterprise Publican Partnerships is the new trading name for our tied leased and tenanted business. It is, and will remain for many years, the largest part of our group. As at 19 March 2016, we had 4,688 pubs trading within the leased and tenanted estate and they have grown their like-for-like net income by 1.5% in the 25 weeks to 19 March 2016.
The new regulatory regime arising from the Small Business, Enterprise and Employment Act is expected to come into effect on 26 May 2016. We will work constructively with the newly appointed adjudicator to embed the new requirements of this legislation. In advance of this new operating environment, we will be launching a new deal for publicans in the form of an Enterprise Premium Tenancy. It will continue to offer many of the benefits of existing tenancy agreements but will be enhanced through reducing property obligations for publicans and a commitment that, where appropriate, we will match the value of capital investment made by our publicans.
Enterprise Commercial Properties
We are rapidly expanding our high quality commercial property portfolio operated within Enterprise Commercial Properties. We had 245 commercial properties as at 19 March 2016, the vast majority of which trade as pubs on a free-of-tie basis. These properties have an annualised rental income of £14.3 million (average rent of £58,000) and were valued at 30 September 2015 at £167 million, resulting in a gross yield of 8.5%. The like-for-like net income from this portfolio has grown by 6.3% in the 25 weeks to 19 March 2016.
We expect to be operating in excess of 300 commercial properties by 30 September 2016 although scale in itself is not our primary objective as we will constantly assess opportunities to crystallise and capture value from this estate.
Craft Union Pub Company
Our largest managed house operation is our Craft Union business which operated 42 sites at 19 March 2016 and which we expect will be operating around 70 sites by 30 September 2016. This business predominantly operates in the north of England but is beginning to expand south and we expect its offer to appeal nationally. Currently, its offer is wet-led with quality beers, at affordable prices, served in local, well-invested, community pubs. The simplicity of the offer mitigates the execution risk and also limits the required capital investment.
We have 32 pubs operating within Craft Union that have traded for more than one month and these pubs are generating annualised site EBITDA of £82,000, from an average capital investment of £115,000, which delivers pre-tax returns of 27%. As we enhance our offer and accelerate the rollout programme we would expect these pubs, on average, to generate site EBITDA in the range of £80,000 to £100,000, whilst gradually reducing the required investment to be in a range of £75,000 to £100,000.
Bermondsey Pub Company
As at 19 March 2016 we operated 16 managed pubs within our Bermondsey business. We plan to expand this to around 25-30 pubs by 30 September 2016.
These Bermondsey pubs operate under two retail propositions. We have 11 sites operating successfully in our "Meeting House" format, an upper mid-market, mixed food and drink offer. We also have five sites operating under our "Friends and Family" format which is in the value-led segment of mixed food and drink offer. At this stage these five sites are not achieving the desired level of returns for the Group and we are reviewing whether this highly competitive retail segment is a priority for further capital investment or whether we would be better redirecting capital to other more value enhancing retail segments.
We have nine pubs operating under the Meeting House retail proposition within Bermondsey that have traded for more than three months. The average capital investment in these conversions has been £203,000 and they are now generating annualised site EBITDA of £124,000 providing pre-tax returns of 21%. As we expand and enhance our offers within Bermondsey we would expect the average capital investment to remain in the region of £200,000 with average site EBITDA expected to be in the range of £125,000 to £175,000.
Enterprise Managed Investments
In order to compete successfully in certain retail segments, pub operators have to be innovators and highly flexible so they can adapt to changing consumer needs. The offer can be complex and so the operational execution risk is heightened, as are the potential rewards for those that do succeed. We have developed a partnership "Expert" model whereby we can work with carefully selected managed house operators to share in the benefits of trading certain high quality establishments in our estate.
Hippo Inns is our first partnership, established with Rupert Clevely, founder of Geronimo Inns, and we currently have two pubs in operation, with a further four openings planned in the coming months. We are today announcing a further partnership with the creation of Mash Inns, a new venture with Laine Pub Group. We are also pleased that Laine Pub Group will be providing us with support and advice on the next stage of development of our Craft Union Pub Company. We aim to announce further partnerships in the second half of the year and expect to have at least 10 pubs trading under our various relationships by 30 September 2016.
Capital structure
We recently announced that the bondholders of the Unique securitisation have voted in favour of proposals to amend certain aspects of the documentation to permit the increased operation of managed houses within the securitisation. With these amendments due to be implemented formally in the coming days, we believe the capital structure can fully accommodate the delivery of our strategic plans.
Having established a clear operational strategy, and having amended aspects of the capital structure to enable the delivery of that strategy, we have now developed a clear framework with which to determine the appropriate capital allocation to deliver maximum shareholder value.
Capital allocation framework
ETI generates significant cash flows from trading activities supplemented by disposals of non-performing assets. We plan to implement a returns-based approach to the utilisation of our future cash flows which seeks to continue our debt reduction programme and provide a balance between additional value enhancing investment opportunities and more immediate returns to shareholders.
The capital allocation framework will firstly ensure that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and costs associated with debt refinancing, together with on-going investment in our business. We are committed to steadily reduce our leverage levels over the medium term and assuming we are on track to satisfy this objective then any "excess" cash flow can be assessed for alternative use such as, in particular, investing further in the estate or returning capital to shareholders.
Based upon current trading and the good progress the Group is making against our strategic objectives, the Board expects the business to generate £25 million of excess cash flow in the current financial year. Applying the capital allocation framework, the Board intends to use this excess cash to fund a share buyback of ETI shares for cancellation.