A new report into shares of pub companies says that current stocks are “undervalued”.
In a note called “UK Pubs: It's a 'quid pro quo', not just a 'quid'.” – Deutsche Bank retains its buy recommendations for Enterprise Inns, Greene King and Punch Taverns.
This is despite the market punishing pub stocks in the past quarter, viewing them as entirely geared at the UK consumer, it says.
It warns that the market seems determined to “drive all the prices down” – but also adds that Deutsche Bank is “still very cautious” about the current trading of tenanted pubs
The report states: “Most of the pub shares that we cover here appear undervalued on a long term basis.
“What is difficult to determine, with so much short term uncertainty, is just when the tide may/will turn back in favour of pub stocks, especially since historically they have been see as defensive, in times of economic slowdowns.”
It also adds: “It would be easy to reduce all our forecasts based on a very bearish trading scenario since it appears that the market just wants to drive all the prices down to low single figure P/Es and build in worst case expectations for a UK recession – which in our view it has been more than successful in achieving.
“However, we just do not see that there is any historical evidence to suggest a scenario, although we do recognise that sentiment towards the stocks will remain low until prove otherwise.”
Keeping its buy recommendations for Enterprise and Greene King, the analysts write: “As they have performed so well in 2008 – one with broadly flat profits (Enterprise Inns, BUY, TP 860p) and the other with underlying growth (Greene King, BUY, TP 1,125p), we have maintained our stock preference.
“We see both groups being ahead of the pack again in 2009E. Greene King has the most levers to pull of any group and has proved itself most adept at dealing with cost inflation.”
The note continues, saying the chance of Enterprise converting to reit status remains “high” and adds: “With a stable asset and cash flow base, it is inconceivable that that the shares should trade for long at the pro forma dividend yield implied by the current price – roughly two and a half times the base rate.”
The bank also keeps its buy recommendation for Punch Tavern but “with some caveats” saying: “We do not believe it will breach banking covenants covenants; in which case the equity should at least double if not treble by the time it has to refinance its convertible in
2010.
“For the risk averse, one could buy the convertible, which will get repaid, but is currently yielding around 20%.”
