Stonegate - Calculating the limits of that A&E
All,
Please find our all-updated analysis of Stonegate here.
The SSNs have traded up a lot since details of the Platinum transaction were announced last month. But is it justified and will the new bonds trade at par - as the current prices are implying? Will there be enough liquidity and what may be required to give effect to an Amend and Extend? We allocate the pubs by type to Stonegate’s now three legs and split P&L and Cashflow accordingly to gain a better understanding of where the company generates how much cash.
Investment Considerations:
- At these prices, there is hardly anything for us to do on these bonds. April will come and so will the A&E. We think that perhaps there should be trading opportunities on the new capital structure once the dust settles.
- The SSNs are trading very tight - in full anticipation of an Amend-and-Extend and not unreasonably so. If the offer from TDR is as generous as to have instruments trading at par is not evident to us and any new bond may come under pressure before the picture improves. But Even with a pub valuation on a 7% Cap Rate the bonds remain covered by the RE alone - just.
- Operationally, Stonegate may say it has reached a trough, but operationally the company is not out of the weeds. As long as the strategy is to hold your breath and hope - while the glass is half full - the tables can turn on Stonegate.
Where is the Free Cashflow?
- Almost regardless of assumptions, there will be little cashflow coming out of the PropCos for the remaining structure.
- We conclude that roughly 1/4 of the remaining FCF contribution will be coming from the Unique and 3/4 are to come from the Stonegate pubs.
Unique must be changed:
- Even with certain growth assumed, Stonegate will have to support Platinum with cash flow, at least in 2024.
- Without Unique, the cashflow generated at Stonegate and Platinum will be entirely insufficient to sustain the current debt load.
- To amend and extend the bonds (we achieve 1.25x FCF interest coverage at 10% coupons) the company has to refinance Unique by either pre-paying substantial make-wholes or - possibly just by exploiting any extra flexibility in its documentation once the M-Notes mature in April.
Q423 Update:
- Revenue is growing for Stonegate, although comps are getting harder as COVID-19-impacted periods roll off.
- LfL Sales Growth has suddenly come to a halt. Having been up for most of the last year - mostly on price inflation, Stonegate have found it harder to raise prices further without compromising volume. Branded bars in particular remain in negative LfL territory and Managed Pub LfLs are falling. Branded Bars continues to suffer as the High Street remains down, the young demographic struggles with cashflow and has for years been turning away from familiar formats including AllBarOne. Bars performed well in Q4, however, offering a glimmer of hope.
- The L&T/Operator business has had a good 2023, with Revenue and Profit rising (excluding utility costs), mostly on aggressive price rises. We observe the same trend at Punch.
- The L&T and Operator Led businesses are outperforming the Managed portfolio, because the latter is less of a staple in the daily routine of workers and because it is prone to cost inflation in the kitchen.
- Wage inflation - concentrated, as far as Stonegate's own books are concerned, on the MP estate, is further tearing into the cost structure and represents a risk in the L&T and OLed estates where Stonegate may have to compensate in time.
- Energy costs, meanwhile, have been falling and the company is hedged 100% through the winter and 50% through the summer.
- Q4 12% profit decline in managed pbru.
- Profit excluding Utilities is rising again.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk