Spirit to beef up investment in managed estate

Pubs group Spirit Pub Company said its managed boozers are outperforming the market, but the less sexy leased estate continues to see like-for-like sales decline, as expected by the management.

Underlying profit before tax in the 28 weeks to March 3rd rose 7% to £20m from £18m at the interim stage last year.

Earnings before interest, tax, depreciation, amortisation (EBITDA) and other non-underlying items edged up 3% to £70m from £68m the year before.

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Non-underlying items comprised: a £19m value added tax rebate relating to value added tax on gaming machines; a £23m mark-to-market charge on interest rate swaps; a £9m gain on the repurchase of debt at below issue price; £6m of restructuring costs.

Underlying earnings per share advanced 12% to 2.2p from 2.0p a year earlier.

Revenue improved to £393.6m from £378.1m at the half-way point of the previous financial year.

In the managed estate, where Spirit has its own employees in charge behind the bar, like-for-like (LFL) sales were up 5.6% year-on-year, ahead of the general market, according to the Coffer Peach Business Tracker. The estate includes well-known brands such as Chef & Brewer and Taylor Walker.

The leased estate, where landlords tie themselves to supply and leasing agreements with Spirit, LFL net income was down 4.5% from a year earlier. This performance was in line with management expectations, with the decline driven by rent re-basing and pressure on beer volumes.

Capital expenditure for the first half of the financial year was £64m with £56m invested in the Managed brands, £2m in the Leased estate and £5m in infrastructure projects.

Given the strong returns achieved to date Spirit has accelerated its investment programme into its Managed brands and expect the full year spend to be between £85m and £90m.

Despite that, the group still found the cash to recommend its first dividend since being spun off from Punch Taverns in August of last year. The board has recommended an interim dividend of 0.65p.

"While we are mindful of the ongoing economic uncertainty and consumer pressures, we remain on track to deliver our full year expectations," said Mike Tye, Spirit's Chief Executive Officer.

Broker Panmure Gordon described the update as "a good set of interim results" and reiterated its "buy" recommendation and 56p price target. "Sales growth and margin progression is best in class," Panmure Gordon noted, in reference to the stock's premium rating versus the sector.

Peel Hunt said the results were close to its expectations. "Technical downgrades may create some short-term weakness, and this represents a buying opportunity," Peel Hunt's Paul Hickman reckons.

The shares edged down to 53.75p at one point in the day from an overnight value of 55.5p, before clawing back a penny of the losses.

"Given the substantial growth characteristics, the shares reflect a buying opportunity at a 20% FY2012E PER [fiscal 2012 price/estimated earnings ratio] discount to Wetherspoon," Hickman noted.

"We are not changing our [full year] forecast, which is about 2% below consensus. Consensus may adjust 3% downwards, reflecting the exclusion of pension interest gains, but this is purely technical," Hickman concluded.

JH