New board Chief executive Ian Dyson revealed more details of the senior management roles in the soon-to-be demerged divisions of Punch. Neil Griffiths will remain in his role as property director at Punch and will get additional responsibilities for the turnaround division. Peter Brook will be in charge of the 550 leased pubs within Spirit. AWP tax windfall The cashflow figures factor in £18m that has been claimed from HMRC in overpaid VAT on gaming machines, following a legal ruling that has allowed operators to claw back payments. The figures also factored in £9m of pensions payments in H1 following three-year valuations. Estate: numbers and capex The number of pubs in the estate fell 10% over the period, from 7,398 to 6,678. Acting finance director Steve Dando said he expected capex to be £120m over the six months. Leases in managed estate Expenditure on exceptional items, which hit £370m, included an onerous lease charge following 14 managed pub lease reversions from TCG in the period. The sites had total annual rent of £3m. The pub impairment (£367m) and goodwill writedown (£81m) reflected the transfer of pubs to the turnaround division within the leased estate. Spirit conversions Editda was up 5% in Spirit, which consists of 800 freehold pubs and 550 sites held on lease and tenancy. In total 135 pubs received investments in the period, with 220 planned for the full year. Food sales now account for 39% of turnover. “Despite the impact of cost inflation been able to maintain and slightly improve margins.” Like-for-like operating profits in Spirit were up from £47m to £49m. Customer ratings External audits have shown that 70% of guests rate their experience nine or 10 out of 10, up from around 60% one year ago. Mike Tye, managing director of the managed pub arm, puts it down to “working hard to raise the calibre” of staff, with what he called the “obsession with the guest”. This will manifest itself in the future with trials of by-monthly screenings of DVDs for staff aimed at improving customer service. “We are just starting to work on that now,” Tye said. Managed estate: costs Tye said that in the first half year the company managed to mitigate the “vast majority” of the cost increases, but this is going to be “more difficult” in the next quarter, where the division will try to “hold costs at best”. Refurbishments and estate repositioning Tye said the plan is to have completed 500 refurbishments by the end of the year, which includes 120 Chef & Brewers, 100 Fayre & Squares, 50 Taylor Walkers and 50 Flaming Grills. In the past 18 months 400 pubs have received investments, and the company has managed to reduce the cost of refurbishments by 50%, meaning a 30% decline in refurbishment capex. A further 12 disposals are planned in the second half of the year. Up to £400,000 was spent refurbishing the leased pubs in the managed arm. Turnaround division fortunes Roger Whiteside, who heads Punch’s leased estate, flagged up some positive signs in the turnaround division, which is soon to receive 1,000 extra pubs. Whiteside pointed to a 4-5% decline in tied volumes in the division, which he said compares favourably with double-digit declines last year. Seventy per cent of turnaround pubs are currently let, and they will be disposed of when they become vacant. Net income per pub in the turnaround division is £39,000, compared to £78,000 in the core estate. The turnaround pubs account for 25% of the total ebitda in the leased estate, despite accounting for 43% of the pub numbers. Going forward, the focus for the turnaround arm will be “producing cash flows in the short term” before selling the pubs for the highest price possible. Core pubs investment In total 269 schemes were completed in the core estate, representing a spend of £17m. Impact of new leases Whiteside said of the new Buying Club leases, “hopefully it will finally dispel any ambiguity about how the tied model works.” He said the strength of the new leases can be shown from the fact that Punch employees are “starting to think about taking our pubs now” - this wasn’t the case when he started, Whiteside said. Franchise trial The company revealed that trials are on-going of a franchise-style agreement where the licensee takes a proportion of the sales and has to meet certain running costs. Dyson told M&C Report that it mirrors Marston’s Retail Agreement. “It’s more of a franchise,” said Dyson. “It’s not a traditional tenancy. The partner in that pub will take a portion of the sales and have to meet certain expenses. It manages risk better for the partner and gives us better control [over the outlet].” It’s currently being trialled in a “handful of pubs”, with roll-out expected “in the coming months”. Turnaround disposals Dando said it’s “very unlikely” that the pubs being disposed of will be sold in big tranches. He added: “We expect one third or 40% of those to go for alternative use, with two thirds to stay as life-style units.” Dyson told M&C Report that the company has had a “whole range of enquires” about the pubs and he expressed confidence that the timetable for disposals would be met. Analysts’ reaction Douglas Jack of Numis said: “We are holding our forecasts. For 2011E, our full year assumption that managed pub LFL sales rise by 3.5% is likely to prove over-cautious. For the leased estate, our full year assumption of -6% LFL ebitda is consistent with H1’s -7.8% on the basis that LFL ebitda is improving by 2% per quarter. “We estimate Spirit’s equity value to be: £1,364m EV (9.0x ebitda) -£850m forecast debt + £115m cash transfer - £97m onerous lease provision = £532m (83p/share). We estimate Punch’s equity value to be worth £2,321m EV (8.5x ebitda) - £2,231m forecast debt + £115m of cash + Matthew Clarke (£47m) = £257m (39p/share). “[The] £370m of post-tax exceptional costs mostly related to writing down the turnaround estate to £278k/pub (reducing group NAV to 189p/share; 125p/share ex goodwill), compared to which 190 pubs were sold in H1 for £326k/pub (48x ebitda). In H1, net debt (including £260m of effective cash at PLC) fell £198m to £3,079m, including a £14m profit on retiring bonds; complimenting this trend with stabilising ebitda in Punch is key to crystallising the potential upside from the de-merger.” Simon French at Panmure Leisure said: “The group has made a good start to the third quarter and remains on track to meet our full year expectations, with trading in the first five weeks continuing in line with management’s expectations with strong like for like sales growth in the Managed estate and an improving like for like trend in the Leased estate. The group now expects capital expenditure for the full year to be around £120 million, reflecting an acceleration of the managed pub refurbishment programme. “The group now also expects disposal proceeds of around £120 million for the full year. It is making good progress on the demerger which remains subject to the finalisation of a number of areas, notably certain legal, tax and regulatory matters. The demerger is expected to complete by the end of the summer. “For FY 2011E we forecast £122.8m PBT (13.6p EPS) slightly below consensus estimates of £124.0m PBT (14.0p EPS). We don’t expect much change to consensus on the back of today’s statement. “Punch trades on a FY 2011E P/E of 5.5x and an EV/editda of 9.1x. We value Spirit at 75p per share: the Spirit debenture has equity value of £362m (56p per share) and £120m cash (19p per share) and Punch Taverns Plc at 25p per share: £120m cash (19p per share) and c£39m (6p per share) value in the Matthew Clark JV; the Spirit business is valued at a small discount to our M&B implied target multiple of 8.7x ebitda. We continue to think that Punch is undervalued but think it is unlikely to trade at its sum-of-the-parts value (100p per share) until there is greater granularity on the allocation of the Plc cash, current trading trends and increased visibility on the turnaround potential within Punch A and Punch B. “However we think the current c21% discount is too wide and believe this will narrow as the demerger approaches; as such we reiterate our Buy recommendation.” Punch’s share price fell 4.65p (-5.85%) to 74.85p today.