Cut in profits dampens Spirit Group's IPO plan
by The PMA Team
Fresh doubt surrounds the float prospects of Spirit Group, the UK's largest managed operator, after profit margin dropped. One City analyst is now claiming that the chances of Spirit seeking to float are "reducing by the day".
Like-for-like sales in Spirit uninvested pubs 92% of a group of 1,080 pubs that were the subject of a £1.2bn bond issue last November in the 26 weeks to 19 February were flat.
Total sales rose by 2.2% with a 6.1% increase in food and a 0.4% increase in drink sales. Analysts seized on a drop to 31.3% in pub operating profit margin in the quarter to 19 February from 34.4% in 2004.
They also expressed concern about a fall in Ebitda margin to 27.1% from 29.9%.
Michael Cox, of Royal Bank of Scotland, said: "It suggests that full-year sales would have to increase by 10.3% to maintain the same cash Ebitda, something very unlikely on the performance so far.
"The (managed) pubcos are unable to increase prices and therefore rely on growing volume, improving the sales mix, negotiating supply contracts and investment to offset rising cost pressure. In Spirit's case, lower prices and a changing sales mix away from drinks towards food, will also have reduced margins."
Key cost increases for Spirit have been the national minimum wage (tipped to cost an extra £6m this year) and a 20% increase in utilities costs and Sky increases.
The company pointed out that prices had reduced in some former Scottish and Newcastle Retail pubs. Flat sales here were a result of higher volumes and lower prices.
Cox added: "It seems that Spirit is underperforming against the rest of the managed pub sector. We expect this to continue since Mitchells & Butlers has more in reserve to offset difficult trading, in particular the renegotiation of the supply contract with Coors, which is due this year."
Cox forecast that Spirit would undershoot its Ebitda target by £14m or 6.6% for the full year and hit a figure of around £200m.
One industry expert said: "Almost on a daily basis the Initial Public Offering chances are going down."
