Moody’s paints dour picture of pub sector prospects

Pub carvery

Moody’s has warned that “operating and trading headwinds” are likely to lead to further struggles for the UK pub sector in the coming 18 months.

The analyst firm told investors that economic challenges would challenge pub securitisation transactions, with key credit metrics showing early stages of a potential deterioration.

“Pub operators’ earnings are being curtailed by changes in consumer demand away from beer consumption as well as macroeconomic factors including a rising national living wage, inflation and Sterling depreciation,” said Thomas Rahman, assistant VP and analyst at Moody’s.

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In addition, any upside in free cash flow (FCF) growth is limited due to high capital expenditure in converting and rebranding pubs.

It noted that pub operators are moving away from traditional wet-led propositions to focusing more on serving food, which brings with it a capital cost.

Since 2016, EBITDA per pub has been declining, amid rising employee costs and inflation. It suggests that major players could be in danger of breaching covenants by the end of next year if wages rise and demand does not pick up.

The rise in the national living wage to GBP7.50 per hour in April 2017 from GBP7.20 per hour in April 2016 has negatively affected underlying profits, it said.

A further increase to is planned for April 2020, further limiting any upside potential for EBITDA and FCF.

Rising inflation, too, has increased operating costs among pub operators. A significant portion of the goods sold at pubs are sourced from overseas and any further declines in Sterling and/or subsequent rises in inflation will further erode EBITDA, Moody’s warned.

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Andrew Seymour

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