10% profit drop since smoke ban for hosts
The smoking ban has reduced the profit of the average tenanted licensee by 10%, analysts at Goldman Sachs have claimed.
In the medium term, Goldman Sachs has argued, “rental incomes are likely to fall, reflecting the lower profitability of the pubs”.
Analyst Oliver Neal said: “A key issue for tenanted/leased pub companies in the year ahead is how the rebasing of the profits of their tenants or leaseholders affects the level of rents.
“Any correction in the rent level is likely to be lagged, as rents are reviewed every 3-5 years depending on the terms of the tenancy or leasehold.
“We lower our earnings estimates for the tenanted businesses of Enterprise Inns, Marston’s and Greene King, driven by reduced forecasts for both beer sales and rent.
"We now assume that rents rise by 1% in the current year, decline by 2% next year (as rent reviews start to reflect the impact of the smoking ban) and are flat the year after.
“In our view, the smoking ban has significantly (-10%) rebased the fair maintainable trade (profit) of the average pub, on which its rent is based (rent is usually calculated as 50% of fair maintainable trade).”
Goldman Sachs said that pub freehold values are likely to fall over the next 12 months.
It claimed this threatened the “virtuous circle of higher asset values, a greater ability to take on debt, and a rapid rate of earnings-enhancing acquisitions”.
However, Goldman Scahs said there were “positive catalysts” on the horizon with the impact of the smoking ban likely to lessen after its anniversary in July.
In addition, pub sector stocks tend to outperform the stock market over the following six months where interest rates are cut by 1%.
Goldman Sachs rated Greene King has the least expensive stock. “It has a relatively strong balance sheet, which should enable further acquisitions at a time when we expect pub values to fall, and is well exposed to the Southeast, which has the highest population growth in England.”
Goldman Sachs upgraded Greene King to buy from neutral while downgrading Enterprise and JD Wetherspoon from neutral to sell.
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