Analysts have given their response to Punch taverns H1 numbers this morning.
Douglas Jack, of Numis, said: “We are holding our forecasts of £193m EBITDA versus a retained £193-200m guidance range. Core LFL net income was in line during the first six weeks of H2; we forecast flat average EBITDA over the full year. If the 8.5x EV/EBITDA rating holds, we estimate stable EBITDA and c.£90m annual debt reduction would equate to 59% growth in equity value over the next two years.”
In our view, re-rating risk from 8.5x EV/EBITDA (Enterprise Inns: 9.8x) is on the upside, particularly if Punch can negate any risks relating to the MRO through: developing a managed estate; trialling franchises; encouraging free-of-tie pricing; and potentially selling free-of-tie pubs into a possible Enterprise Inns’ REIT.
Mark Brumby, of Langton Capital, said: “At the time of the group’s FY numbers back on 12 Nov 2014. Chairman Stephen Billingham said ‘we can now focus on improving our business through investment in our pubs, attracting the best partners to work with us and providing industry leading support to our partners to launch and develop their pub businesses.’
“Unfortunately, the above statement was followed closely by news that a Market Rent Option was to be given to tenants and, though the details as to any potential carve out of pubs where there has been ‘substantial investment’ remain to be worked out, the uncertainty caused by this development has weighed heavily on the group’s shares since the company last reported.
“Punch’s restructuring straddles two financial periods meaning that there will be no shortage of exceptional items in FY15’s numbers but, on looking through this at underlying trading, observers should be able to discern value.
“Whilst trading is in line with expectations and the group remains in positive territory, the overall numbers remain in something of a flux. We are of the view that around 21p (1.05p in the old form) should be achievable and, though there may be further forecast changes as the impact of the MRO becomes clearer, this represents something upon which the company should be able to build.
“Uncertainty clearly remains but we would suggest that there is material upside potential within Punch. We have commented before that profit is the difference between two large numbers, EBITDA and interest paid and it, profit that is, could move markedly higher.
“Similarly, re the balance sheet, shareholders’ funds are the difference between freeholds and debt. A bout of inflation could move this number materially and, whilst that is not particularly likely, the group should be able to de-gear under its own steam.
“Whilst many will be put off by the lack of clarity with regard to the MRO, Punch’s shares will comprise a large part of the small cap index and, as such, the upside represents a risk to those non-holders who are benchmarked against it. We would suggest that the shares are worth a look.”
