M&C Report takes a closer look at the full-year results for Punch Taverns, the leased and tenanted pub company: Approaches and disposals Responding to recent reports that the company had received approaches for the whole or part of the group, Punch chief executive Roger Whiteside said that Punch had sold around 1,800 pubs over the last three years “one at a time”. He said: “With the market where it is and with the lack of appetite to finance such deals, I don’t anticipate such deals taking place.” Of the disposals the group has completed and looking toward the 2,000 it hopes to still carry out, Whiteside said he expected many to be acquired by local entrepreneurs. He said: “Those local businesses and entrepreneurs with cash available will be the main beneficiaries, in some respects we will be replenishing the free-of-tie sector.” The group sold 398 pubs during the year, all but seven from its turnaround estate, for proceeds of £108m. The disposed pubs generated just £4m of Ebitda over the last 12 months. In its current financial year the group has sold 53 pubs in the last eight weeks and is “on track to reach its target of disposing of 500 pubs a year”. It is expected to raise up to £630m from the sale of the 2,000 turnaround pubs. Whiteside said that he didn’t expect much crossover between the turnaround and core estates, but the company’s approach would remain flexible “depending on each individual case” in regards of sites moving from one estate to the other. Core estate Punch invested in 327 core pubs out of its 2,951-strong core estate during the year at a cost of £38m. Whiteside said that investment values ranged from minor “Sparkle” and “Ready-for-Business” spends all the way up to individual “Transformational” spends of £350,000. He said: “We are committed to developing an estate of well invested, high quality pubs representing the best leased pubs in the UK. Underlying this commitment, we expect to invest in over 400 core pubs over the coming year.” Food Whiteside said the company had an experienced food development team, supported by a dedicated marketing team in place to improve food sales. He said: “This alongside the targeted capital investment will drive further food penetration in the core estate over the coming years.” He said that Punch would focus on four areas as part of its Reaching for Growth initiative – investment to improve customer environment and increase food sales, attracting high quality partners, driving sales growth and effective support to improve pub performance. Partnership Whiteside said that the completion of the Pathway to Partnership programme had “created a platform on which we can set out to attract the best quality partners to lease our core pubs”. He said he expected a limited number of these core pubs to be returned to the company each year, but that it aimed to recruit the “best partners with the best business plans to create value in these pubs for the future”. Approximately 95% of the pubs in the core estate are currently let on secure agreements leaving c.150 pubs available to let to new partners. Whiteside said that new applicant enquiries remained strong and that the group was attracting increased interest from small multiple pub operators and microbrewers. Turnaround The core division comprising 2,951 pubs accounts for around 76% of Punch outlet EBITDA. These pubs have a much higher average net income per pub than the turnaround estate at approximately £78,000, and have demonstrated much greater resilience with a decline in net income of just 2.1% in the year. Analyst reaction Douglas Jack at Numis said: “Full year PBT, at £76.3m is ahead of our £73.0m forecast and materially ahead of consensus’ £68.5m. PLC cash is in line (at £113m; 17p/share of cash), in addition to which the Matthew Clark JV should be worth 5p/share. Our 15p/share price target reflects the amount we estimate could be returned to shareholders in 2013E, if appropriate. “The 9.1x EV/Ebitda rating versus Enterprise Inns’ 8.5x (2011) suggests no equity value outside the £113m of PLC cash (17p/share) and the Matthew Clark holding (which we value at £35m or 5p/share). Net bond support should erode this equity value by £20m (3p/share) pa. Management intends to support the bonds as it believes the long-term equity value is more than 23p/share, but if does not transpire, a return of all cash to shareholders should occur.” Jack recommended the shares as a Buy, with a target price of 15p. Lindsey Kerrigan at Panmure Gordon said: “For FY 2012E we estimate £58m PBT (6.4p EPS), in line with consensus expectations of £58m PBT (6.7p EPS). This reflects the disposal of c500 non-core pubs and a slight increase in the interest charge to 6.9%. From FY 2013E we forecast 2.0% LFL net income growth in the core estate. We also forecast a gradual reduction in central costs to reflect the shrinking non-core estate size. “On our forecasts the group is trading on a CY 2011E P/E of 1.1x and an adj., EV/Ebitdar of c9x, compared to Enterprise Inns (Buy, 110p TP) on a CY 2011E P/E of 1.4xx and an adj., EV/Ebitdar of 8.5x. We reiterate our Hold recommendation and 11p price target based on a CY 2012E adj., EV/Ebitdar of 9.0x. Given the current economic uncertainty and subsequent preference for quality stocks, we see little likelihood of near-term outperformance.”