'Measured approach' likely from Punch
A leading analyst has said that although there is a myriad of options available to Punch Taverns in regard to tomorrow's strategic review, the most likely outcome is a measured approach to unlocking shareholder value.
Simon French at Panmure Gordon said "It is difficult to try and second guess the intentions of Ian Dyson, but we believe a measured approach to unlocking shareholder value would be most appropriate.
"Punch has reported three quarters of improved trading, and last week's update revealed that the group appears to be making better than expected progress in the turnaround of its managed pub business (Q2 LFL sales +8.6%), the majority (658 pubs) of which is contained within the Spirit securitisation vehicle (along with 567 leased pubs). There are a further c145 managed pubs held at the Plc level, most of which we believe to be loss making.
"In FY 2010A the Spirit securitisation vehicle generated £130.7m EBITDA, and we think this could to increase to £140.0m this year. We estimate £828m net debt in the securitisation at the year-end, and valuing the earnings on 8.5x EBITDA would imply equity value in the securitisation of £362m (56p per share), along with the cash and bonds of £274m (43p per share) at Plc level at the end of Q1 and c£39m (6p per share) value in the Matthew Clark JV. Taken together, this underpins our 105p price target.
"A committee of bondholders has said that it has had no meaningful consultation with Punch Taverns and, therefore, if Punch sought to restructure the bonds, it would vote it down on principle."
French said that he saw the following as the most likely options to have been discussed within Punch:
- No change to the current group operations or capital structure but an acceleration of the disposal of non-core pubs to reach the core estate of c4,700 leased pubs, which have a long-term, sustainable future.
- Indication to withdraw financial support to the Punch B securitisation, which is likely to lead it to breach covenants in the medium-term. This can then be used as leverage in negotiations with bondholders to reschedule the amortisation profile in the Punch A securitisation.
- Indication to withdraw financial support to the Punch A and Punch B securitisations, which will likely lead them to breach covenants in the medium-term.
- The demerging/disposal of the Punch A and Punch B securitisations, and subsequent disposal of the 50% shareholding in Matthew Clark to leave an integrated leased and managed pub company.
French concluded: "With cash and bonds at the Plc level, a 50% shareholding in Matthew Clark (the drinks distributor) and a rapidly improving managed pub business, we believe the risk reward balance lies on the upside. As such, we reiterate our Buy recommendation and 105p price target."
