Numis has commented on the Budget, which it describes as ‘mixed for the sector’:
“It should indirectly encourage higher revenues through raising disposable income, and reduce the corporation tax rate. We expect to make detailed forecast adjustments over the next few days, which should fully reflect increases in labour costs due to the National Living Wage (affecting managed operations), fully reflect reductions in corporation tax and assume minimal revenue benefit. Subject to managed orientation and year-ends, we expect earnings adjustments to range between plus 1-2% and minus 3-4%.”
Specifics:
- It is a budget that encourages growth and higher disposable income. Some of the increase in the personal tax allowance and the National Minimum (now Living) Wage should benefit revenues within the sector.
- Overall, Numis expects to cut PBT forecasts for 2016E (with year-ends after March) and 2017E for companies with managed operations to reflect the proposed 9% increase in the National Minimum Wage (NMW) from £6.50 now (£6.70 in October) to the new National Living Wage for over 25s at £7.20 in April 2016.
- The impact will be influenced by the share of managed pub employees that are a) over 25, and b) over 25 and currently on the NMW. Numis expects the majority of employees on the NMW to be under 25, with exposure to the NMW being even lower in London. However, many employees who do not benefit directly from this legislation will still benefit from pay differentials being maintained.
- Impact of higher labour costs. Numis’ initial estimate is that the first full year annualised cost for a dedicated managed operation could be a c.5% reduction in PBT, 2-3% for a regional brewer, and minimal for a franchised/tenanted business. The first year impact should be diluted by the timing of year-ends, with possibly higher revenues and lower corporation tax then minimising the impact on EPS.
The ability to raise prices should also affect the extent to which forecasts change. It is clear that most premium operators have a stronger ability to pass on rising costs. Managed discounters, such as JD Wetherspoon, are likely to be worst affected, in the Numis view.
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