Struggling pub group Enterprise Inns (LSE:ETI) today announced that it has swung to a profit in its recently ended financial year as revenue grew and lower exceptional costs helped boost profit margins.
For the fiscal year ended September 30, the heavily indebted pub group reported a pre-tax profit of £75m, up from a pre-tax loss of £71m the year before. Revenue rose to £623m from £625m last year. Exceptional charges decreased to £47m from £193m.
By division, like-for-like net income in the tenanted and leased business grew by 2.1%, while net income for the group’s commercial property portfolio grew 3.8%.
Strong cash generation helped the group further reduce its debt burden during the period. At the end of September group net debt was £2.2bn, down from £2.3bn in the year-ago period. Net cash flows from operating activities increased to £269m while net proceeds from property disposals were £98m.
Debt problems
Enterprise Inns has had some problems with its debt pile in the past, but it now looks to be getting these issues under control. At the end of the financial year, the company reported a net asset value of £1.4bn with £3.6bn of property assets offset by net debt of £2.2bn. The company’s net asset value at the end of the period was 296p per share. Based on the group’s adjusted earnings per share figure of 19.6p for the fiscal year ending 30 September 2016, the shares are trading at a historic P/E of 5.2 and P/B of 0.34.
However, despite Enterprise’s attractive valuation, the company looks like a poor investment compared to peer Marston’s (LSE: MARS).
While Enterprise has been struggling to survive over the past few years, Marston’s has gone from strength to strength. From a pre-tax loss of £136m in 2012, City analysts expect the group to report pre-tax profit of £99m for the year ended 30 September. At the beginning of September management issued a trading update stating that it’s on track to hit these targets with like-for-like sales of 2.3% across the group year-on-year. Own brand beer volumes grew 13% over the same period.
What’s more, shares in Marston’s trade at a relatively attractive valuation, support an above average dividend yield and the company isn’t drowning in debt.
Shares in Marston’s currently trade at a forward P/E of 9.8 and support a dividend yield of 5.2%. At the end of the first half of the company’s financial year, net debt stood at £1.3bn, offset by property of £2.2bn.
Foolish summary
So overall, looking at these figures Marston’s appears to be by far the better investment. That being said, Enterprise is heading in the right direction. Debt is falling, and management is taking steps to monetise its freehold portfolio. As management continues to restructure the company, the group’s discount to net asset value should close, which presents an attractive opportunity for value investors.
If you’re willing to take the risk, the company could be a profitable long-term investment, but with so much debt overhanging the group, this is a precarious prospect indeed.
