Leading analyst Douglas Jack has issued a Hold recommendation for Punch Taverns following its Q1 trading update this morning, saying he expects that the valuation gap to its peers should narrow on successful bond restructuring.
Punch this morning reported a 1.4% rise in like-for-like net income in its core estate in the 12 weeks to 9 November, and maintained its view that it intends to announce restructuring proposals in December.
Jack, of Numis, who has a Target Price of 10p for Punch, said the performance was “ahead of full year guidance of 0-1% and our cautious -0.5% full year assumption”.
“We are holding our forecasts, which reflect tougher comps in Q2-4. The next major movement in the share price should be wholly dependent on the outcome of the company’s capital structure negotiations with bondholders.”
He pointed out that the core estate comprises of 72% of the total pubs estate and 82% of EBITDA.
“Positive LFL trading partly reflects: 476 core pubs receiving major investment in 2013, with 400 projects planned for 2014E; food development initiatives (food is 27% of tenant sales); 90%+ of the core estate joining the Punch Buying Club; and strong drink volume growth in franchised pubs, for which the number should rise to c.200 from 48 outlets in 2014E (with the increase weighted to H2).
“Field support has been increased. This has included the launching of a dedicated New Business Team, which supported the roll out of 48 Franchised Tenancies in 2013. Every new licensee will benefit from New Business Team support; this should help to reduce the business failure rate (from 10%).
“£100m of pub disposal proceeds are expected in 2014E. In 2013, disposal proceeds were £149m, with both core and non-core pubs being sold for an average of 18x EBITDA. Another c.1,000 non-core pubs should be sold over the next four years.”
Jack added: “Punch’s shares trade at big discount to Enterprise Inns (9.0x vs 10.3x EV/EBITDA). The new deadline for the bond restructuring is December; if it succeeds, this valuation gap should narrow, in our view. A share price of 30p would equate to 9.6x EV/EBITDA (2014E) based on the proposed restructuring terms.”
