Stonegate - Half Time

All,

Please find our updated analysis of Stonegate here.

Since management floated its performance improvement/turnaround plan, some nine months of the 18-month horizon have passed and it’s worth scrutinising all the progress that hasn’t been made. The £64m EBITDA increase that was supposed to be implemented by September 2025 should be giving rise to ~£180m in sales and -£120m in additional Expenses. Even if the revenue were to come with a lag, we should see some of the expenses coming through by now. Approaching the halfway mark, we can see none of it. Almost.

Investment Considerations:

- For less than 10% YTM we are not taking any position in the company. Compared to Punch, Stonegate looks significantly weaker and is still unable to service its debt without selling more pubs than it buys. Management's turnaround plan does not yet bear any visible fruit and seems at best delayed.

- The bonds are covered by the asset value of the estate, but are at 85% LTV, while EV is not much higher, due to the continued pressure on revenue in bars, gastro pubs and city centre entertainment.

- The SSNs feel like a very highly leveraged bet on the UK consumer, mixed with some secular trend away from alcohol. It is also not yet clear how interested Gen Z is going to be in this estate. We feel we can replicate that bet better elsewhere.

Cash Flow:

- The Estate is still selling some 60 pubs (net) p.a. to generate the cash to pay its interest bill and we think this has to continue for 2025 and probably 2026. It can’t continue forever.

- We struggle to model a self-sustaining Platinum unit on the basis that the pubs transferred into that vehicle were “average”, as management repeatedly suggested last year. Consequently, the collateral left for the SSNs should be poorer.

- The release of any disappointing news following the recent transaction could provide is with a better entry point - possibly in the mid 90s.

UK Consumer:

- Disposable income and discretionary spending are still severely depressed across the country. The recent round of 5% price rises implemented across the estate seems to have therefore delivered only a 3% revenue uplift, suggesting volumes struggled to hold up. This somewhat echoes what we’ve been hearing from Punch, only that that wet-led estate has much lower elasticity than Stonegate's more discretionary bar / city centre / entertainment / gastro pub formats.

- In the medium term we’d expect inflation to filter through into wages and therefore demand. But other than that, we are struggling to see many internal leavers management can pull - except asset optimisation.

Asset Optimisation:

- For the refinancing and already in Q224, management gave a turnaround plan that detailed from which sources Stonegate was going to generate an incremental run-rate £65m EBITDA by the end of FY25, which is September. Some of these initiatives were to drive revenue, others to contain costs and wage cost inflation was accounted for.

- December will mark half-time and at least after the first third of the time-span enviseaged for implementation, we are missing any significant effect.

- Programs such as this tend to be back-ended, hence the run-rate figures. Moreover, they typically first produce incremental cost, before the revenue comes. However, we are even missing the additional cost.

- We are therefore worried the program is at best delayed and at worst fictive altogether.

- We will be focused on some form of update in this regard.

Looking forward to discussing this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk