Not Time Gentlemen, Please!
April 2008 - COMPANY UPDATE UK TRAVEL & LEISURE
334
Pub Sector—Underweight Recommendation Retained
Despite the pub sector’s underperformance, we are not changing
our Underweight stance. We have fresh concerns about rent
growth and the effects of a consumer slowdown that need to be
factored into City estimates. JD Wetherspoon is our only Buy, as
we downgrade Enterprise Inns from Buy to Hold.
Expect rent growth to be below inflation
Rent income growth has been the bedrock of the leased and tenanted pub companies. As
trading difficulties hit the sector and property values cease to rise, we believe that rent
growth will be below inflation. As a result, we are less comfortable with leased pub
companies than we were. This in part contributes to our downgrade of Enterprise Inns from
Buy to Hold.
Pubs are not immune to a downturn in consumer spending
Evidence from the early 1990s recession is that consumers cut back on their spending on
alcoholic drinks. We believe this puts any smoking ban or weather-related recovery at risk
and we are cutting our estimates through to spring 2009.
Investors are still too optimistic about a post-smoking-ban recovery
Even without a slowdown in consumer spending, evidence from Ireland and Scotland does
not support the view that a recovery on the anniversary of the English smoking ban will be
V-shaped. In Ireland, the compound annual growth in pub sales is half what it was before
the ban there, and in Scotland the recovery has been mixed at best.
Valuation and sentiment are not low enough to weather the downgrades we foresee
Despite the underperformance of the pub group, we see no merit in attempting to call the
bottom in the sector at this stage. We believe City estimates are factoring in a recovery that
is some way off; valuations are not historically cheap across the board; and we believe that
(given trading volume and shares on loan) that investor sentiment toward the sector is not
poor enough for a purchase of the pub group to be anything but high risk. We retain our
Underweight recommendation.
JD Wetherspoon is our only Buy rated stock
JD Wetherspoon is the only pub company with material organic growth, which is being
funded out of cash flow. It offers customers a value proposition that is appealing in the
current economic environment, yet the shares are historically cheap and investor sentiment
towards the company is poor. Our target price is 380p.

Contents
Not Time Gentlemen, Please!
April 2008
Executive summary 3
2007 in review 5
The English and Welsh smoking bans so far 7
Smoking ban - no reason for a quick recovery 10
Outlook for 2008 and 2009 13
Asset backing examined 19
Balance sheets stretched, but not a concern 24
Valuation 27
Enterprise Inns 33
Mitchells & Butlers 38
Punch Taverns 45
Greene King 49
Marston’s 53
JD Wetherspoon 57
Appendix 61
Disclosures 65
Legal information 67