Stonegate - Having done more work... - Model update

All, 

Please find our updated analysis of Stonegate here.

Following the Q325 results we felt we should raise our projections for the company as operating expenses turned out better than expected. However, having done more work on the reported figures and the model, we come to the same old conclusion: burning cash faster than maturities allow. But there are short-term triggers and a mighty 10.75% coupon, so is there an angle?

Investment Considerations:

- We are not taking a position in this name. For a long position, the cash flow situation is too negative even for an 11% cash yield, and we are unsure about a good Q325 print heralding a sudden turnaround. For a short position we are concerned that a likely transaction involving the Platinum portfolio could fetch as much as €250m of liquidity. Not that bonds would rally far beyond their call price of £102.7, but we'd be paying approx. 1% per month for the privilege, on top of borrowing costs and would be betting slightly against the odds. The strong asset base also limits the potential down-draft if TDR fumble it.

Platinum:

- Stonegate is still unable to service its interest bill and needs to start selling assets in bigger chunks, as liquidity should start to wear thin next year.

- An orderly refinancing/redemption of the bonds now seems to hinge on a profitable sale of the Platinum portfolio in FY26.

- The Apolo Platinum debt becomes callable in Jan 26. A sale (Punch are also run by Apolo) for any positive consideration would postpone what today seems like an inevitable liquidity crunch in FY27. We (generously) estimate proceeds of up to £250m, assuming Apollo won’t be the only bid at a time when pub estates are difficult assets to bet on.

Other drivers to watch:

- Q325 surprised with very low expenses. However, management's explanations did not convince, and we suspect it was merely a result of the Easter timing.

- Management have indicated maintenance CapEx of £70m p.a. once the estate is in its final shape, i.e. the managed estate is materially reduced. We expect this to be still some time away and offset by lower revenue from L&T and OLed contracts instead.

- Guidance confirmed to reduce the managed estate to 500 sites by the end of the year. 

- When stripping out the football Euros last year, Q325 pub revenues were up 2%, say management. Our problem with that math is that last year, the football Euros allegedly didn’t matter. Still, it may be a legitimate positive data point, and we have forecast continued growth at 1% for the foreseeable quarters.

Here to discuss this name with you.

Wolfgang

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