M&C Report takes an in-depth look at Punch Taverns' Q2 trading update and gauges the views of analysts. Snow disruption On the issue of disruption caused by the snow, Punch Taverns chief executive Ian Dyson said it had a negative impact on like-for-likes for the two weeks before Christmas, when snow hit particularly hard. However, comparables in January “were easier”, due to the heavy snowfall at the start of 2010. “Overall, snow is not any impact,” Dyson stated. Refurbishments When it comes to refurbishments in the managed estate, Dyson said “it may be that we do a few more” than the 200 originally planned for the year. He suggested that refurbishments could be carried to create 70-80 Fayre and Squares,and up to 40 Flaming Grills this financial year. "Chef & Brewer is pretty much done," he said. Investments are achieving a 25% return on investment Pricing in the managed pubs Dyson said the company had not “by and large” gone beyond the VAT rise in January, either for drink or food. “There’s a real strong volume momentum in the numbers,” he said. Dyson said discounting in the managed pubs across the quarter was “roughly the same as it was”. Help for tenants Tenant help remains art around £2m per month - Dyson said the figure for the quarter is “roughly the same as it was”. He described the performance of the leased estate as “less bad” than it had been. “It’s been a period where we’ve seen a real improvement and we expect that to continue. We are still seeing a deterioration but that’s less of a case than it was.” Buying Club Between 25% and 30% of Punch tenants and lessees have now opted to join the Buying Club, Dyson revealed. Currently Buying Club orders account for over 15% of sales. It’s currently restricted to beers, wines and spirits, and Dyson said there are plans to offer food and other areas such as utilities. “We are really comfortable with the service we're providing and we're going to accelerate." Onerous lease provision The company indicated that its onerous lease provision will be in line with the £15m previously indicated. The figure had been arrived at in expectation of improved trading in the wake of investment in leased sites that had returned to the company. Disposals Punch’s acting finance director Steve Dando said he was “confident” the company will reach the target of earning £100m “or above” from disposals across the year, at levels “fairly similar” to the book values - the company has raised £50 to £60 million in the half year. The company disposed of 160 non-core pubs in the leased estate across the half year. In the core estate, disposals have been “a few but not many”. Politics and the tie Dyson said Punch has made a “lot of progress over the last couple of years” to address concerns about the pubco-tenant relationship, highlighting developments like including free-of-tie options in the new leases and the development of the Buying Club. He was asked for his view following news that a Parliamentary Bill calling for Government action on the beer tie received cross party support yesterday. “As a business, we have moved on significantly, and our relationships with our partners, while we won’t say it’s perfect, is getting much better. We know we have a lot more to do but really pleased with our progress.” Analysts Simon French at Panmure Gordon said: “On our forecasts the group is trading on a CY 2011E P/E of 5.2x and an EV/EBITDA of 8.8x. "With £274m of cash and bonds (c43p per share) held at the group level, there appears to be little value in the share price being attributed to either the operating businesses (of which we think most value lies in the Spirit securitisation vehicle), or its JV with Matthew Clark. “We think Punch remains a compelling special situation, and reiterate our Buy recommendation and 105p price target. Douglas Jack at Numis also reiterated a Buy recommendation and upgraded his forecasts by 3% to “reflect the improvement in managed pub trading”. “For 2011E, our full year assumption that managed pub LFL sales rise by 3.5% (vs H1’s 4.9%) is likely to prove over-cautious. For the leased estate, our full year assumption of -6% LFL EBITDA is consistent with H1’s c-7.8% on the basis that LFL EBITDA is improving by 2% per quarter. “High leverage works on the upside as well. The continued improvement in managed pub trading in February suggests that initiatives to build guest advocacy are building momentum. "This should improve the benefit and timing (early 2012E) of the Spirit bond exiting cash trap, reducing the financial risk that has been priced in. The 19.4% stock on loan position adds to the short-term equity upside. “Our 100p sum-of-the-parts based target price reflects the potential to turn around the managed pub estate (now occurring), but ignores possible upside from debt renegotiations/retirement.” Paul Hickman at Peel Hunt also reiterated a Buy recommendation. He said: “This IMS was never going to shed much light on the main issues to be aired in the 22 March strategy announcement. However, excellent managed trading adds value to Spirit, and improvement in tenancy will reduce the difficulty of bondholder negotiations. “Nothing here changes our view that Punch is unique in having a solution to the issue of underperforming securitised tenancies.” Punch Taverns shares rose 5.8%, up 4.12p to 75.12p, this morning.

Topics