Analyst: Punch shares could hit 10p
Punch's day of woe finished with its share price reaching an all time low of 39.75p — a drop in value of over 30% — and one analyst warning they may hit 10p.
Britain's largest pubco announced yesterday that profits at its leased pubs had fallen 12% for the 20 weeks to 10 January.
It has also put all staff on a 90-day consultation notice period with a view to making up to 100 redundancies. The only members of staff not under consultation are operational staff at its Spirit managed division.
Share prices went into freefall and have now lost 97% of their value since reaching a high point of £13.23 in 2007. Shares originally floated at 230p.
Jamie Rollo of Morgan Stanley said he had downgraded forecasts for Punch by 25-30% following yesterday's "extremely poor" trading update. "Our new forecasts take us very close to our bear case scenario, on which we value the shares at just 10p," he said.
"We think many pubs are over-rented, the beer tie is exacerbating volume declines, and many pubs are under-invested. Punch may have to increase its level of lessee support, leading to further downgrades."
Rollo said there were five pressure points on leased pubcos:
1. Many pubs are over-rented: Pub rents have been growing faster than inflation and pub sales, pubco profits have grown at a faster rate than their lessees', financial assistance is growing, pubs available for lease are rising, and 20-30% of pubs are uneconomic (which we define as pubs where lessee income is less than £20,000 per annum excluding accommodation benefit).
2. Beer tie exacerbating beer volume declines: The gap between beer prices in tied and untied pubs is growing, with today's 40--50p per pint differential increasingly noticeable to consumers, and pubcos might have to start passing on more of their significant discounts.
3. Regulatory risk: The Business and Enterprise Committee inquiry into pubcos may need another session and some MPs are demanding closer regulation of the industry, with potentially a removal of the tie.
4. Are pubs being maintained?: Capital expenditure averages £15-20k for a leased pub but £100k for a managed pub.
5. Balance sheet risk: Enterprise and Punch have debt of over 7x Earnings Before Interest Tax Depreciation and Amoritisation (EBITDA), and EBITDA is in decline. Both have refinancing needs in the next three years, both face breaching their cash trap tests in their securitised debt structures, and both are within 10% of EBITDA on certain covenants.
Meanwhile, another analyst, Geof Collyer of Deutsche Bank, suggested that the banks may have to take over Spirit, Punch's managed division.
He described the division 5% fall in margin in the 20 weeks to 10 January as the "single biggest retail margin decline in our team's 22-year experience — last year's Spirit performance holding the previous record".
• Punch: profits down 12% at leased pubs.
• Punch ups tenant support as beer volumes drop 12%.
