Stonegate Pub Company – cost of sales
All,
Please find our updated model here.
We can see how Stonegate could raise £1bn in a sale of assets this year. Stonegate would need to split the operations and freeholds and sell them separately, but it is feasible. Stonegate needs to amend and extend its existing bonds, even if the transaction completes, leverage/LTV is unlikely to reduce given the parameters management gave on the recent results call. EBITDA is crimped by inflation and the impact of lower consumer spending. We expect EBITDA to recover (and leverage to fall), but this will take time.
Investment Considerations:
- Stonegate faces a £2.1bn maturity wall in Mar-25.
- On a current valuation, LTV is 59% through the SSNs, and at our trough EBITDA (Sep-23), leverage will be 9.0x. Refinancing in 2024 will be a challenge.
- By FYE Sep-26 EBITDA we are modelling a recovery in EBITDA and leverage of 6.1x (high but financeable).
- Stonegate needs to move its refinancing out by at least three years (Mar-28).
- Prevarication on the sale or the amend and extend would send the bonds down 10 – 15 points due to the size of the estate. The upside is limited for now.
- if we moved Cap Rates from 5% to 7% => the value would only break above the 2nd lien. At 6% LTV through the SSNs would be in the 80s. Cap rates have not yet risen with Gilts, but persistently high rates will eventually filter through to real estate assets.
A £1bn, 800 pub deal is possible but requires the best assets to be sold:
- We think a deal is feasible but agree with management that it may need to be done in three or four packages.
- Management is targeting an 11x+ EBITDA multiple. Current multiples for pubs are closer to 7x – 8x. By splitting the property and the ownership, Stonegate could take advantage of cap rates that have remained stable.
- Given the five-year and 10-year gilts yield 4.85% and 4.66%, we think a cap rate of 6-7% is realistic.
- FYE23 Leverage will still be around 8.2x (vs our estimates of 9.0x) but will be on a downward trajectory as EBITDA recovers.
- We estimate sale proceeds £990m – Property £575m, Operations £415m.
- Management are expecting to launch a transaction in September.
Credit improvement will be marginal PF a sale, but will improve:
- LTM Leverage is currently 8.6x and LTV c80% (property assets), FYE23 estimate is for 9.0x.
- Our modelling has EBITDA improving quickly in FYE 9/2024 and 9/2025 (to 7x and 6.3x respectively).
Any sale cash is needed to extend maturities:
- Stonegate needs to use its cash to buy itself the time for EBITDA to recover.
- Our base and upside case are based around an amend and extend deal being struck by Stonegate.
- Stonegate has £2.2bn due in Mar-25 and will need to repay some and extend the rest of these maturities.
- Stonegate could tender for £500m of its SSNs @95p/£, the remaining £1.7bn rolling into a three-year (Mar/2028) SSN at 10% with a cash payment upfront of 10p/£.
- if the company wanted a longer deal, the 2nd lien is small enough to be included in any transaction.
- On the recent call, investors suggested a repurchase of the Unique pub debt would free up collateral for a refinance. Management has said that until 2024 the early redemption (make-whole) costs make this unattractive. To us, it makes more sense to retire the higher coupon SSNs.
Trading is weak, as expected in such a challenging market:
– Stonegate is performing close to our model, but the market is weak:
Stonegate’s quarterly numbers were broadly in line with our model. Revenue in Q2 was up 3.6% for the estate but down 3.6% in the Managed business. Market conditions are tough, with suburban locations performing better than the in-town bars. The after 10 pm trade is weak across the urban and suburban estates, both segments have a younger demographic suffering more in the cost-of-living crisis. The next two quarters will be weak due to challenging comps and we expect the cost-of-living headwinds to continue into 2023/24. Management is looking to boost EBITDA by between £60m - £90m through asset optimisation (£25m - £30m) and pricing (£40 - £60m). The higher pricing strategy has slowed due to the weak environment in the Bars business. It also continues to grow as a proportion of the overall cost savings).
look forward to discussing this with you all.
Aengus
T: +44 203 744 7055