Douglas Jack at Numis examines yesterday’s announcement on Punch Taverns’ debt restructure and the pub company’s trading update.
He issued a Hold recommendation at a Target Price of 10p.
On the restructure, Jack said: “Restructuring terms have not changed. Nominal net bond debt should fall by £490m and the MTM losses on swaps should fall by £153m. The cost to equity shareholders is £50m of PLC cash and equity dilution, with bondholders having 85% of the post-restructuring equity. The only difference in these details to our note dated 27 May 2014, is that gross bond debt has fallen by another £19m in the last month.
“Under the terms, debt would fall by 27%. Despite this, cash at PLC would be minimal and no equity dividends would be payable for the foreseeable future. We estimate nominal net debt/EBITDA should fall to 7.6x immediately after the restructuring, to 7.0x in 2016E, from 9.3x in 2013.
“These terms now have a high level of support, including institutions who own/control c.59% of the bond notes and c.54% of Punch’s equity. This transaction requires 75% approval from all asset classes. The board expects the implementation of the restructuring proposals to complete by 19 November, but this first requires noteholders (meeting on 18 July) to vote to extend the covenant waiver request from 4 August (to 19 November).”
Punch said like-for-like net income in its core estate remained at +1.4% in Q3. “The 1.4% increase is slightly ahead of our 0.8% full year assumption and 1% guidance,” said Jack.
He pointed out that the stabalisation comes despite “tougher” comps (H1: -4.5%; Q3: -0.7; Q4: 0.4%).
“This year, the company is also on track to generate at least the forecast £100m of net disposal proceeds and invest £45m of capex in the core estate (average spend: c.£100k per pub). We are holding our 2014E forecast of £40.4m PBT (consensus: £40.5m).
Jack added: “Our forecasts are broadly in line with guidance for LFL net income to rise 1-2% in 2015E and by 2% pa from 2016E, resulting in EBITDA stabilising at c.£200m. Thus, the £80-90m annual decline in net debt from 2015E should equate to the value transferred into equity. It is equivalent to 18% of the post-restructuring market capitalisation.
“Our 10p target price equates to 9.6x 2015E EV/EBITDA, a slight discount to Enterprise Inns’ 9.9x (2015E).”
