A tale of two pubcos' tails

It's a tale of two tenanted pubcos, folks. Enterprise Inns and Punch Taverns are now an interesting contrast. Enterprise boss Ted Tuppen was a study in quiet confidence at results last week. His business model has relied on income per pub ticking up at around the rate of inflation each year.

This allows dividends, reinvestment and acquisitions sufficient to allow a handsome growth in earnings for shareholders. This has not been possible for a couple of years.

The last six months of the financial year has seen income for Enterprise per pub improving to flat. This, argued Tuppen, is the essential prelude to around-inflation earnings growth being restored.

No vanity on Tuppen's part here. He was at pains to stress that the current job being done by Enterprise management is not a lot better or a lot worse than at fellow tenanted pub companies.

Tuppen argued that the advantage for Enterprise is simple — the company bought better pubs over the years, which attract better licensees who tend to out-perform. An indication of the underlying stability is that no rights issue has been needed.

His audience of City analysts weren't entirely buying it. One pointed out that she struggled to understand how Enterprise could post growth in income in future years when beer volumes are declining.

Tuppen pointed towards the evolution away from beer across the estate and that rent reviews showed a lot of the estate's licensees had stable incomes.

Nevertheless, Tuppen agreed that income growth would still be a "challenge". The jury is out on whether life can return to halcyon days of year-in year-out growth. It could be that Enterprise's pubs, with their strong southern bias, are so good that they can afford to offer up earnings growth to Enterprise of around inflation per year.

Equally, its northern estate, still with 17% or so of pubs on non-substantive leases, might continue to be a drag on the company, prompting another round or two of write-downs. Time will tell — but there's a chance that the Enterprise model will start to motor in the way it did during the years of plenty.

Over at Punch, the story is somewhat different. The securitisation chickens have come home to roost. Despite the vital signs within Punch leased starting to twitch positive, the division is being choked by the tendrils of its debt structure.

At the moment the rights of bondholders in the securitisation eclipse the interests of shareholders, creating an on-going cash drain as Punch manages itself out of its leased operational challenges.

Irony of ironies is that Punch bought a lot of managed pubs with a plan to move them on promptly. Now, according to some analysts, they represent the lion's share of the equity value left in the company — and they believe management needs an "unsentimental" approach to the 5,325 pubs in its two leased securitisations.