Stonegate - Time is not on our side.
All,
Please find our updated analysis of Stonegate here.
The name is nearing its refinancing - the market is asking for it. Admittedly we’ve missed the trade into refinancing on this name, but we actually still feel that the SSNs are trading a little rich. To get their ordinary par refinancing, they need the 2LNs to extend and the longer TDR wait, the less eggregious the terms of that should be. With no obvious downside triggers in sight and plenty of real estate to back the SSNs, none of that should matter - as long as the glass remains half full.
Investment Considerations:
- At these prices there is nothing for us to do in these bonds. The M-Notes have been redeemed and depending on discussions with the 2LN we'll see either an A&E or a straight refinancing. 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, given the trends. However on an absolute level we are still struggling with the implicit valuation.
- The 2LNs would not trigger if the WBS were to be broken up, but leaving them outstanding would prevent an ordinary refinancing of the SSNs. Either Stonegate wait for better results to come through (have time) or TDR take advantage of the glass-half-full market and inject a little cash to lubricate the discussion with the 2LNs.
Q124 Update:
- There was nothing revolutionary in the update, except for a £40m final COVID insurance payment that the company received. We admittedly did not have that in the projections. Every little helps...
- Managed Operations tacitly turned the corner with +3% in LfL Sales. Operator Led pubs calmed down to +3% LfL, down from 10.3% for all of 2023, but profits continue strong. Lead by beer inflation, L&T pubs sell at +7% LfL and continue rising.
- As the strong beer inflation is weighing slightly on volumes, the company has been posting better margins and EBITDA continues to improve. That is apparently true for all pubcos these days.
- Stonegate benefit from better energy hedges this year vs. 2023 by £10m.
Timing:
- This depends on TDR’s ambitions. An Amend & Extend could be achieved now - but it also achieves little. A par refinancing would benefit from a little more time and given beer inflation, Stonegate have some easy comps to beat this year.
- The 2LNs mature in 2028. The SSNs could technically be refinanced and the WBS replaced without triggering these notes. But that limits the options to only an A&E on the SSNs.
- If TDR decide to push the 2LN to A&E now, they could effect a SSN refinancing, but would have to pay up for the 2LNs to roll. The 2LNs know there is no urge, so they won’t be played with.
- For the full par refinancing, results still need to improve (if we were asked to refi the 2LNs anyway). So given all is back in safe patterns now, time is on TDR’s side.
- If it’s just an A&E eventually, we think that for the SSNs 97.75p/£ on the offer is a little tight.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk