This is a company I have not looked at for a very long time. My interest was raised by a post on Expecting Value. The price to book value of 0.5 and reasonable PE (5× pre-exceptional earnings) it looks like a bargain, and sales of assets paying off its debt, but with some worries about low returns and constant downward revaluations of fixed assets.
The more I looked at it the less I liked it. The low returns are not just a problem in themselves, but they are slowly declining, making management claims that the pubs being sold are lower quality. If what was being retained were the better businesses, then we should see a rise in returns, but ROCE fell from 6.9% in 2009 to 6.3% in 2012, with similar declines in returns calculated in other ways (using EBITDA, using slightly different asset numbers, etc.).
It is not entirely clear from the accounts, but it looks to me as though:
- Pubs intended for sale are revalued, almost always downwards. In fact are much of the revaluation (227m of 691m in the last four years) are of “non-current assets held for sale” — i.e. pubs that are up for sale.
- They are then sold at a little more than the revalued price, generating a small “profit on sale of property, plant, and equipment”.
With £675m of disposals from “non current assets held for sale” over the last four years, it looks very much as though revaluations are roughly equal to the actual market value of pubs being sold: project that forward (and the trend in returns supports doing that) and that promising 0.5 price/book looks about right.
The calculations above are somewhat “back of an envelope” and the comments on revaluations (the last para above) may well be wrong, but I think it cannot really be improved much of the information available. The market is working nicely and has value Enterprise Inns fairly.