Stonegate - If Coyote ran a pub chain…

All,

Please find our updated analysis of Stonegate here.

So the market has been open and TDR haven’t pulled the trigger. Q2 had undeniably good news on the closing of key supply contracts that should hold purchase prices stable for the next three years. But performance was a little disappointing - especially in the Managed division and we find the run-rate promises we received earlier in the year are becoming increasingly difficult to model. We add to that a depressive and uncertain consumer and cold weather and even the Euros won’t be able to make the difference we expected. It all feels like Coyote has run off the cliff. Sometimes he gets lucky. Often he doesn’t. Perhaps on the downside, TDR should bridge the gap, but it’s taking more time than we thought.

Investment Considerations:

- We are not taking any position in Stonegate. The risk is too binary and the fundamentals too static now to warrant that for our strategy. Depending on discussions with the 2LN we'll see either an A&E or a straight refinancing. However, we think any new bonds will soon trade at a discount. That may be a more attractive entry than what we are seeing now. 

- The SSNs are trading very tight - in full anticipation of an Amend-and-Extend and not unreasonably so, given the trends. Still, on an absolute level we are still struggling with the implicit valuation. 

- Leaving the SSNs outstanding would prevent an ordinary refinancing of the SSNs. Either Stonegate wait for better results (England are doing well in the Euros, but the weather is bad) or TDR inject a little cash to lubricate the discussion with the 2LNs.

Q324 Guidance:

- Overall we find it increasingly difficult to hold on to the promised EBITDA run-rate of €460m by year-end. At the rate of current LfL improvement, this target will require ever more extensive adjustments. In the context of a refinancing, we wouldn't lend credence to it.

- Stonegate have, however, increased prices in the L&T division in April by 5%. Arithmetically, this should drive up to €15m EBITDA.

- The managed and Operator-led divisions have not moved much.

- The L&T division is set to disappoint slightly. Weather continues cold and up until the European Cup (end of the quarter) sports fixtures have been weaker than last year. England have been doing well in the Euros however and we expect this performance to show in the quarter.

- Outside the MP division, wage inflation is expected to continue to drive sales faster than it drives costs. Overall, wage inflation now outstrips cost inflation, which should be slightly positive for EBITDA.

Q224 Update:

- Volumes continue sluggish as prices remain elevated but no longer growing as quickly as in 2023. Cost price inflation is slowing down, allowing for margin recovery. 

- The Managed Pub estate gave up its improvements seen in Q1 and produced negative LfL sales and even more disappointing EBITDA. This is in line with other consumer goods and services in the UK.

- Within the Managed division, in particular the high street bars and late-night venues resumed the rate of deterioration and losses displayed throughout most of FY23. 

- Key going forward should be the news that beer supply contracts are to hold prices flat for the coming three years. In times of elevated inflation, this should allow Stonegate to rebuild margins.

Elasticity:

- Pub groups are finding that price rises are becoming harder to implement as volumes are down YoY. Prices therefore remained on hold in Q2 but were lifted +5% in the L&T division in April '24.

- Operator lead prices are also up +5%.

- Managed pubs by contrast are already in negative LfL territory and offer less of a consumer staple than the pub after work. Price rises slowed down to +2.1% for drinks and +3.3% for food.

Procurement: 

- Since Q224, Stonegate has new beer supply contracts in place with key suppliers that will supply the company with a more premium range of beers - in line with consumer trends. Crucially, cost prices are expected to remain flat over the coming three years, which should allow the pub operator to drive margin via price inflation.

Here to discuss with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk