Hickman: Budget adds to my negativity
A City analyst has reported the Budget increases in alcohol duty add to his negativity about pub sector prospects.
Paul Hickman, of KBC Peel Hunt, said: "On top of rising cost prices the budget duty increases add to our negativity on the sector driven by our expectations of weaker consumer spending. We reiterate our sell on MAB (414p), JDW (270p), and PUB (610p). We remain buyers of Enterprise Inns (400p).
At 2%, the historically high level of alcohol duty increase is further evidence of government's indifference to the economic pressures facing the licensed sector.
The 2%, while not apparently high, becomes significant when added to existing cost increases of c4% pa in beer driven by input price increases. Trade bodies such as SIBA are predicting more pub closures as a result.
Those immediately most affected will be tenants, who at retail level, have to bear the bear the full wholesale prices from brewers whereas managed pub have the option of passing on discounts.
This will make tenanted pubs less competitive. The two main tenanted pub companies are Enterprise Inns (100% tenanted) and Punch (about 80% tenanted).
However, we are more concerned at the impact of a reduction in demand on more highly geared companies. We are negative on Mitchells & Butlers (SELL) whose earnings are, we estimate, about 5x geared to the top line and Wetherspoon (SELL) up to 7x geared. That compares with Enterprise Inns (BUY), which at 1x geared to the top line is relatively resilient. While Punch's earnings are also relatively low geared at about 20%, it has a relatively weak balance sheet so we also rate Punch a sell."
