Ei Group News | The Twelfth Magpie

Forget Whitbread! I’d buy this well-performing share instead

Kevin Godbold — Tue, 14 May 2019 11:05:36 +0000

Ever since Whitbread sold off its Costa Coffee chain to The Coca-Cola Company I’ve lost interest in the firm. With fast-growing Costa gone, Whitbread’s remaining hotels and restaurants businesses look over-priced by the valuation to me, given that operations are so cyclical.

Trading well and reducing debt

Instead, I’d rather invest in EI Group (LSE: EIG), which is active in the hospitality space by running pubs. Unlike Whitbread, EI sports a modest-looking valuation. But the shares have been doing well, up almost 70% in the past year alone. Even now, the price-to-tangible-book value is running just below 0.8, suggesting the company remains far from being over-valued.

I’d be the first to admit that the pub business is bound to possess a lot of cyclicality of its own, and the general decline of the pub industry in the UK has been well documented. Indeed, you don’t have to travel far just about anywhere in the country to see repurposed or shuttered and weed-bound ex-pubs. Surely, I’d be nuts to invest in the sector at all. On top of that, EI doesn’t even pay a dividend!

However, something has been going on in the business that makes the stock attractive to me and which reflects in that juicy rise in the share price we’ve seen. I don’t care whether my total returns from investing come from dividends, capital gains, or both. And with EI, given the attractive-looking valuation and operational momentum, I reckon we could see further rises in the share price over the coming years.

Today’s half-year report reveals further progress with the strategy of monetising assets and paying down debt, which is working with a backdrop of steady trading. Things are going well and underlying profit before tax came in at £59m in the period, up 3.5% compared to the equivalent period the year before. The gain mainly came from lower interest rates because of the way the firm has paid down some of its debt.

Optimising value

Indeed, during the period, EI sold 348 “commercial property assets” raising almost £333m. The directors have been ploughing surplus funds into debt-reduction and net borrowings are down around 19% compared to a year ago.

The strategy involves switching pubs from tied publican partnerships to free-of-tie agreements. Then, when value can be “optimised”, the assets are sold, as we’ve seen recently. The directors expect to convert around 40-50 properties a year “for the foreseeable future” into EI’s Commercial Properties category, which will have the potential for monetisation by disposal in the future.

As well as reducing borrowings, the firm is rewarding investors through its share buy-back programme, which I reckon is helping to drive the share price higher. Today, the directors announced a further £30m commitment to the programme, which takes the total announced since 15 March up to £65m. The purchases should be complete by the end of September.

I think EI’s value-led strategy is interesting and the company is worth deeper research with a view to me picking up a few of the shares.

The post Forget Whitbread! I’d buy this well-performing share instead appeared first on The Twelfth Magpie.

More reading

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Thomas Cook Group crashes another 20%. Here’s a FTSE 250 stock I’d buy instead

Roland Head — Tue, 27 Nov 2018 12:30:50 +0000

It’s been a bad year for package holiday and airline operator Thomas Cook Group (LSE: TCG). A long hot summer meant Britons were reluctant to book holidays to southern Europe and North Africa. The company was forced to slash prices to attract bookings.

On Tuesday, the FTSE 250 firm issued its second profit warning in two months and suspended its dividend. The news has pushed the shares down by another 22% at the time of writing.

The Thomas Cook share price has now fallen by 70% so far in 2018. Should we start buying, or is this still a stock to avoid?

What’s gone wrong?

Although sales rose by 6% to £9,584m last year, underlying operating profit fell by £58m to £250m during the 12 months to 30 September. The main reason for this was an £88m fall in profits from the Tour Operator business, which was forced to offer heavy discounts late in the season.

Although profits rose by £35m at Thomas Cook Airlines, much of this was cancelled out by £28m of “legacy and non-recurring charges” at group level.

Shareholders will be disappointed that the dividend has been suspended, but a sharp rise in debt suggests to me that this was a necessary precaution. The net debt was £389m at the end of September. That’s nearly 10 times greater than the £40m reported this time last year.

Management said the company is still compliant with its banking covenants, but I think debt could become a serious concern if trading doesn’t improve quickly.

Good news on the horizon?

Chief executive Peter Fankhauser said that although the UK market remains very competitive, he’s confident the group will be able to report stronger profits and improved cash generation next year.

Analysts’ forecasts before today were for 2019 earnings of 8.9p per share. This would put the stock on a forecast price/earnings ratio of just 4.2. However, I suspect these forecasts will be cut after today’s news. With debt up sharply and an uncertain outlook, I plan to avoid this stock for now.

One stock I would buy

Pub chain EI Group (LSE: EIG) has already been through a tough restructuring process and is now delivering a steady recovery. Formerly known as Enterprise Inns, EI’s share price has risen by 30% so far this year.

The company’s estate is divided into three divisions. Managed Pubs are staffed and run directly by the firm. Like-for-like sales rose by 7.1% in this division last year, suggesting a strong performance.

The Publican Partnerships division operates tied pubs that are leased or run by tenant landlords. Finally, Commercial Properties owns pub and non-pub properties that are leased to independent businesses.

EI has indicated that it’s open to selling off some or all of the Commercial business. This could help accelerate debt reduction and leave the firm in a position to restart dividend payments.

The stock could still be cheap

In recent years, EI’s board has chosen to buy back shares rather than pay dividends. With the stock trading at a 44% discount to its book value of 334p per share, this approach makes sense. It provides excellent value for money and boosts the book value of its remaining shares.

Profits have now stabilised and the group’s cash generation remains excellent. I believe EI could deliver attractive gains over the next few years. I’d rate the shares as a buy.

The post Thomas Cook Group crashes another 20%. Here’s a FTSE 250 stock I’d buy instead appeared first on The Twelfth Magpie.

More reading

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This FTSE 100 growth stock is one investment I’d buy and hold until retirement

Roland Head — Tue, 15 May 2018 14:30:50 +0000

With stock markets at short-term highs, I’ve cut back on my buying activities. At the moment, the only stocks I want to add to my portfolio are companies I believe are significantly undervalued on a long-term view.

Today I’m looking at two companies that could fit this description.

New strategy is delivering results

EI Group (LSE: EIG) was formerly known as Enterprise Inns. It’s a mix of pub chain and commercial property company. The EI share price is up 4% at 131p at the time of writing, after the company issued a solid set of half-year results.

The group has three divisions — leased and tenanted pubs, managed pubs, and commercial property. Each delivered a positive performance during the first half.

The benefits of its shift from tenanted pubs towards managed ones were highlighted by decent sales figures. Whereas like-for-like (LFL) sales only rose by 0.6% at tenanted locations, managed pubs saw a 6.6% increase in LFL sales over the same period. The number of managed sites has doubled to 276 over the last year.

These shares could double

The group’s underlying pre-tax profit was unchanged at £57m during the first half, but net asset value rose from 313p to 326p per share, thanks to a reduction in net debt. This means that at a price of 130p, the shares trade at a discount of 60% to their net asset value.

For a profitable business this seems too low to me. The problem is that EI isn’t really generating much in the way of growth. There’s no dividend at the moment and shareholders face a real risk that the company will remain a slave to its net debt of £2.09bn.

Personally, I’m becoming more optimistic about pub stocks. Trading in 6.3 times forward earnings and at a 60% discount to book value, I think EI could double in value over the next five years or so.

A safer alternative?

EI’s high debt load and lack of growth means that it’s not without risk. My next company also operates in the hospitality sector, but has very little debt and a strong record of profit growth.

FTSE 100 firm Whitbread (LSE: WTB) owns the Premier Inn and Costa Coffee chains. The group’s sales have risen by an average of 10% per year since 2013, while operating profit has increased by an average of 8.4% per year over the same period.

This firm’s profitability is also much stronger. Whitbread’s return on capital employed (ROCE) was 14.5% last year, compared to just 6.1% at EI Group. ROCE is a useful measure of profitability as it compares operating profit with the money invested in a business.

Companies with a high ROCE are generally able to fund expansion without too much debt. They also tend to generate a reliable supply of free cash flow for shareholder dividends.

Still good value?

Whitbread’s share price jumped higher recently after the group announced plans to spin out the Costa Coffee business into a separate concern. It’s expected to attract a higher valuation alone than as part of a group.

However at £42, the share price is broadly unchanged from one year ago, despite continued growth. Trading on 15.8 times forecast earnings, I think there’s room for further gains.

I believe Whitbread shares should hit £50 at some point, giving potential upside of about 20%. I’d be happy to buy at current levels.

The post This FTSE 100 growth stock is one investment I’d buy and hold until retirement appeared first on The Twelfth Magpie.

More reading

These value stocks are trading at big discounts

Roland Head — Fri, 16 Jun 2017 06:00:22 +0000

Much of billionaire investor Warren Buffett’s early success came from investing in companies whose shares traded at a discount to the value of their assets. This traditional value investing technique can deliver impressive profits, but care is required. When companies trade below book value, it’s often for a good reason.

Today I’m looking at two companies trading at big discounts to their book value. Is either stock a genuine bargain?

A property turnaround?

Ei Group (LSE: EIG) is probably still better known as pub chain Enterprise Inns. The company recently changed its name, as it’s aiming to move away from operating tied pubs to become a commercial property landlord.

However, the reality is that this business is still dominated by an enormous debt hangover from before the financial crisis. The group has net debt of £2.17bn, backed by £3.58bn of property assets. That’s equivalent to a loan-to-value ratio of 60%, which is high for a commercial property firm.

Subtracting net debt from the value of the property portfolio gives a net asset value of £1.45bn. Ordinarily, Ei’s market value should be somewhere close to this figure. But at the time of writing, the firm’s market cap is just £645m. This means that at 135p, the shares trade at a 55% discount to their book value of 300p.

If this discount eventually closes, then buying these shares could be very profitable. But it’s not clear to me how likely this is. The group generated an impressive £269m of operating cash flow last year, but £155m of this was used for interest payments and £70m was spent on refurbishing pubs.

So far, debt reduction has mostly been funded by pub sales. If this situation continues, then the stock’s low valuation may be justified. I’d want to do more research before considering whether to buy.

This bank could be cheap

Challenger banks such as Virgin Money Holdings (LSE: VM) have been a profitable investment over the last few years. But Virgin Money has lost 15% of its value over the last 12 months, even as competitors soared ahead.

What’s gone wrong? Well, it may be nothing. But investors have become concerned about the credit card market, an area where Virgin has delivered rapid growth. The bank’s credit card balances have risen from £1.5bn to £2.7bn in the last 15 months, and it’s targeting £3bn by the end of 2017.

Much of this growth has been driven by offering interest-free periods of up to 41 months. Banks record profits from credit card customers during these interest-free periods, on the assumption that customers will start paying interest at a later date. So credit card growth has been making a nice contribution to Virgin’s profits, even though many customers aren’t paying any interest.

The risk is that instead of staying loyal, customers nearing the end of their interest-free period will simply transfer their balance to another provider offering interest-free lending. If this happens, credit card issuers such as Virgin could be forced into significant profit writedowns.

The bank’s shares currently trade at a 28% discount to net asset value, with a forecast P/E of 7.8 for 2017. This may seem cheap, but the prospective dividend yield is just 2.1% and the situation looks uncertain to me. I think there’s better value elsewhere.

The post These value stocks are trading at big discounts appeared first on The Twelfth Magpie.

More reading

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.