Stonegate - Great Expectations
All,
Please find our updated analysis here.
So it’s been complicated - very much along expectations and justifying our caution about participating in this deal. The best pubs have had to be spun off into a vehicle so leveraged that it can’t pay dividends and despite injecting £50m more cash than we thought, TDR have had to hand upside to their most junior creditors. But creditors have overall done well and the company gets the time it needs to convert some of the great Run Rate expectations into actual EBITDA. That may prove attractive soon enough and we are looking for a better entry point after the dust settles.
Investment Considerations:
- We are waiting on the sidelines just a little longer. The good news from the Euros and the Olympics should be largely communicated and priced in now and any disappointing news might only come now that the A&E is done. Over the medium term we mostly lend credence to the company's asset management plan and so are looking forward to potentially acquiring the bonds at a discount later in the year or next.
Key Value Drivers:
- Summer 2024 earnings should be good with the Euros and Olympics expected to drive business.
- Asset Optimisation: The pub conversion plans are apparently fully aimed at the remaining Stonegate estate, concentrating the expected improvement in earnings and leverage on the part of the company that matters the most to the bonds. In 2024, the company resumed investments in its estate, to typically move pubs out of L&T and into MP or OL. Management are forecasting a £22m run-rate benefit by September 2025.
- Long-term average pub valuations, however, cover the debt.
- Beer inflation over principal supply contracts with stable prices for the next three years should raise margins significantly.
- Energy: Energy hedges for 100% of Q224 and 50% of summer 2024 are favourable vs. 2023 by £10m.
Key Risks:
- The company is unlikely to deleverage materially in the coming 12 months. While the investment and asset optimisation programs are underway, these should take 18 months - following pub conversion - to come to full fruition. At the same time, interest payments are rising even further and pubs are out of the market while under refurbishment. The run-rate improvements management sold the refinancing on will take 2-3 years to materialise, which means the actual EBITDA will only show in 4.5 years - when it's time to refinance again.
- Much cash flow is being trapped in the WBS in Unique. Stonegate have extracted some of the estate into the Platinum structure, but the N-Notes are holding on to a structurally sr. £300m net value buffer and certain dividend restrictions apply. The Platinum structure also seems very cutely calculated and further investments in the structure are prohibited under the bond documentation. There is a risk of losing control over this holding in case these pubs suffer another setback in the coming years.
- There is a good chance that the latest price rises of 5% in the L&T division were only implemented to drive some short-term profitability to push the A&E deal over the line, but that they will turn out to damage footfall going forward. All the good news are priced in at this stage and we fear any disappointment.
- The Managed Pub estate is still struggling as much as it did in 2023. We think this segment and in particular bars and late-night venues will take another year or two before they even begin to recover.
- We find the stabilisation of wet volumes over the coming years that is underlying management's plan to be overly optimistic. We see no basis for this assumption.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk