A SPOTLIGHT ON THREE OF THE KEY COMPANIES WE’VE MET DURING THE PAST QUARTER, SUMMER 2016
Theo Wyld, Research Analyst
James Godrich, Fund Manager
52 WEEK HIGH-LOW: £1.35 – £0.69
NET YIELD: 0.0%
HIST/PROS PER: 5.8 – 5.2
EQUITY MARKET CAP: £496m
Simon Townsend, CEO and Neil Smith, CFO
Enterprise Inns (ETI) boasts a portfolio of over 5,000 UK pubs. The majority of the estate is operated under what is known as a ‘tied and tenanted’ model. Under this arrangement, a publican pays below market rent to ETI and in return is bound by contract to sell the beers that the company buys in bulk and at a discount from various breweries. In this model ETI has their predictable rental income supplemented by a share of sales.
The market is changing however, with legislation brewing known as the Market Rent Option (MRO). Although not finalised yet, it is anticipated that under this new ruling publicans will have the option to break the tie to the ETI-provided beers in exchange for higher rent. Although the latter benefits ETI, they lose their economies of scale in bulk ordering the beer which eats into their margins.
As well as navigating the upcoming legislation, the relatively new management team undertook a strategic review of the business with a fine tooth comb and have communicated their five year plan. This involves disposing of c. 1,000 pubs whilst diversifying the remainder of the estate across tenanted, leased, managed, and commercial models. Clearly, this is not without considerable execution risk, however the benefits to be reaped, should they pull this off, could be extensive.
The story prior to the strategic review had been all about paying down debt. ETI remains highly geared, as EBITDA has fallen off concurrently, but in absolute terms Net Debt has reduced by c. £1.4bn since the crisis. The company is now in a position to invest in the business itself and is at a c.70% discount to NAV.
52 WEEK HIGH-LOW: £3.86 – £3.12
NET YIELD: 2.7%
HIST/PROS PER: 20.9 – 16.0
EQUITY MARKET CAP: £8,412m
Sarah Levy, Investor Relations Director
Kingfisher operates as a home improvement retailer under well-known brands such as B&Q, Screwfix and other European brands. The Group has over 1,100 stores across ten European countries including a major presence in France, Poland and the UK.
Since the appointment of the current CEO, Véronique Laury the Group has begun its new ‘One Kingfisher’ strategy. This is a five year plan aimed at unifying their international offering whilst improving digital capabilities and operational efficiency. Through this they expect to deliver a £500m sustainable annual profit uplift by the end of year five over and above ‘business as usual’. They also expect to return £600m of capital to shareholders over the next three years and are targeting a total cash cost of £800m.
At the heart of their decision to reform is the quite disparate running of each of their individual businesses. This manifests itself in the group wide offering of 393,000 different SKUs (stock keeping units) of which only four items were sold across all five of the Group’s brands. During our most recent meeting we were given the example of the Group’s lightbulb offering which has been reduced from 2,824 to 498 SKUs and has seen a 20% cost price reduction as a result.
Clearly this is a quite major shift in the Company’s strategy and culture. The unification of nine separately run companies into one Group will be quite a challenge but the potential for increased operational efficiency and significant cost savings means that I believe this is a project well worth taking on. Both Kingfisher and the market are well aware that this fundamental change in strategy carries significant risk and the concern remains that Kingfisher may have bitten off more than they can chew.
52 WEEK HIGH-LOW: £6.39 – £4.82
NET YIELD: 2.1%
HIST/PROS PER: 38.0 – 23.0
EQUITY MARKET CAP: £6,616m
Simon John, Investor Relations VP
Sage provides business management solutions to small and medium sized enterprises (SMEs) predominantly in Northern Europe and the US. Sage has a niche product offering in business management software and a high level of recurring revenue that has delivered multiple years of organic sales growth ahead of inflation whilst increasing margins and returns on capital; an encouraging indicator of persistent pricing power.
The relatively new management team announced their strategy in June last year. It became evident during the meeting that departing management had done a good job picking up assets but a lesser one on centralising the process and generating efficiencies. Sage are focussing heavily on concentrating their product range to a suite of three main subscription offerings that cater for the complete range of SMEs of which there are circa 75m companies.
Sage are firmly number two behind Intuit in the US and struggle to compete. However, they believe the sheer size of the addressable market justifies their presence. In France it is a case of keeping up with the strong local players, however most recent numbers out of the region have been more promising. Sage see cloud-based products as the future and despite having been slow to enter this market, the new management team are heavily focussed on moving in this direction.
Our recent meeting with representatives from the company was informative and reassuring. I see a lot of easy wins in terms of centralisation and efficiencies to come in the medium term. The business plan is to move towards recurring service revenues and the cloud, which could help them address the market needs.
We met the companies below and you can learn more on any of these by contacting the person at JM Finn & Co with whom you usually deal.
Coats Group, Rio Tinto Plc, BHP Billion
Barratt Developments, Carr’s group, GKN, Imperial Tobacco
Whitbread, Saga, Kingfisher, Greene King, Enterprise Inns, Pearson, GVC Holdings, RELX
Barclays, Lloyds, British Land
Howden Joinery, Cobham, Spectris, Carillion, Equiniti
OIL & GAS