Spirit writes down value of pubs estate

Pubs group Spirit's hard hit leased estate continued to offset a strong performance from the managed pubs division in the final quarter of the financial year.

In the 12 weeks to August 18th, like-for-like (LFL) year-on-year sales growth in the Managed estate was 4.1%, dragging down the growth rate for the full year to 4.8%. LFL growth in the first 40 weeks of the group's financial year had been 5.0%, down from 5.6% at the half-year stage.

The performance was better than the 2.0% LFL sales growth Panmure Gordon had been expecting.

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The Managed pubs division saw LFL food sales in the fourth quarter grow 4.5% from a year earlier, giving a full-year growth rate of 6.4%, down from a growth rate of 7.1% at the 40-weeks stage.

Drink sales were up 3.3% from a year earlier in the final quarter on a LFL basis, which meant LFL sales for the 52-week period were up 3.8%, a slight decline from the 3.9% growth seen in the first three quarters of the financial year.

"Our Managed pubs division delivered another quarter of solid growth, notwithstanding volatile trading conditions and the adverse impact of both the wet summer and the Olympics," the company's statement said.

Things were not so peachy in the Leased estate, where LFL net income was down 5.4% on the final quarter of the corresponding quarter of 2011. For the full 52-week period, the Leased estate's LFL net income was down 4.9% on the previous year.

The company said the Leased estate continued to be affected by current year rent rebasing. Sorting out the performance of this division is the company's prime focus at the moment.

Meanwhile, after calling in independent experts to look at the valuation of the group's pub estate, Spirit Pub Company is changing its accounting policy to move to an open market valuation basis in the interests of giving greater transparency on the underlying value of property assets than the previous method based on historic cost.

The result of this change will be a downward revision of half a billion quid on the valuation of the estate to a book value of around £1.3bn. The adjustment will be reflected as a non-cash item on the income statement when the group announces its full-year results next month.

"Our Managed estate performance remains significantly ahead of the market and we continue to implement measures in our Leased estate to improve performance. Whilst the consumer environment remains tough, we continue to perform in line with expectations and are making good progress towards realising the full potential of our business," said Mike Tye, citing Coffer Peach Business Tracker as the basis for his out-performance comment.

Broker Peel Hunt, which is bullish on the stock, said the fourth quarter was broadly in line with expectations. "Given the weather, Olympics and tough comparable benchmarks, this represented a solid performance," Peel Hunt's Nick Batram suggested.

Although the Leased estate's performance made for grim reading, the fourth quarter 5.4% LFL decline in net income was a sharp improvement on the 8.0% decline in the third quarter, Batram noted.

"The attraction of Spirit remains the upside potential from a programme of self-help, following the period of underinvestment when it was part of Punch. In a relatively short period of time, good progress has already been made within the Managed division, but the real benefits are still to come through," Batram reckons.

"The Leased estate is more challenging - the last shackles of Punch's involvement were only thrown off in March and the negative hit from rent rebasing is also clouding the issue. However, with a proven management team and a clear strategy we believe that Spirit will ultimately deliver," Batram asserted. The broker has an 82p target price for the stock.

Panmure Gordon said the "reassuring" trading update is unlikely to spark a rush by brokers to change full-year earnings estimates.

It said the write-down in the value of the pubs estate was larger than it expected, and the new valuation implies a net asset value per share of less than 70p. Panmure Gordon's target price for the stock is 67p.

"Self-help measures should lead to double-digit earnings growth, which combined with a c4% yield, makes Spirit an attractive investment proposition in our view," Panmure Gordon said.

JH