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We outline potential catalysts to drive significant value at the business previously called Enterprise Inns
Thursday 08 Nov 2018 Author: Lisa-Marie Janes

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 self-employed 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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