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Spirited future?

From The Publican


After announcing their latest results, it's clear that Punch Taverns is thriving, but does it also have something else up its sleeve? Hamish Champ reports.

Almost predictably, Punch Taverns announced yet another set of robust numbers last week. For the year to August 20, turnover grew by a fifth to £770.1m, EBITDA was up by a similar fraction to £412.1m and pre-tax profits rose 28 per cent to £207m.

Per pub profits in the existing Punch estate grew four per cent and the group said its capital investment programme - which saw more than £60m pumped into nearly 1,000 developments - is set to pay further dividends in the coming 12 months.

Feeling the pressure

In a market under pressure from almost every quarter such figures are impressive, in spite of being driven by three decent-sized acquisitions in the last two years.

But for industry watchers, journalists and City analysts there was only one question to be asked of the powers-that-be at Punch: "C'mon boys, are you going to buy Spirit or aren't you?"

Like any chief executive conscious of his company being plonked squarely atop the central cog of a bidding rumour mill, Punch's Giles Thorley has become adept at not commenting on such matters. On this occasion his only comment was an equally predictable "no comment". Recent press coverage suggests that R20's Robert Tchenguiz is going head-to-head with a former colleague, ex-WestLB banker Robin Saunders, in the battle for Spirit. But one could be forgiven for having forgotten that Punch effectively triggered the whole "who's going to buy it, when and for how much?" back in the summer with its unsolicited approach.

That Punch is beavering away behind the scenes to secure a significant chunk, if not all, of Spirit's estate remains a given for most industry watchers, evidence or no evidence.

Mr Thorley has given nothing away recently, but was asked last week, hypothetically of course, whether Punch could viably handle the task of transferring a significant number of managed houses into tenancies. Without going into specifics, he was at pains to stress that it had a good track record in this area.

It would be a leaping to conclusions exercise of quantum proportions to infer from this that a deal is in the pipeline. Yet few doubt that if it were, Punch's integrative skills would be utilised to considerable earnings-enhancing effect; that what had been done before could be done again.

Checking the figures

As to the figures themselves, Punch's financial performance was on the plus side of satisfactory. With a full contribution from the 2,900-plus Pubmaster estate, bought in December 2003, a near-full year from the InnSpired pubs bought a little over a year ago, and a fortnight's business from the Avebury estate, Mr Thorley had justification in pointing to a good year driven in part by "value-enhancing acquisitions".

Organic growth came in at 2.5 per cent, while the financial footing of the group had been secured with a restructuring of its debt back in the summer and interest cover now stood at 2.1x and was rising.

Mr Thorley defended a six per cent rent increase across the estate - well in excess of inflation - by pointing to the slowdown in the income derived from beer sales. "Rent rises are agreed on an individual basis with tenants and reflect the underlying profitability of the business," he said. Increases in rents were being compensated for by discounts on beer, he added.

As for the future, Mr Thorley said the group was "well placed" to buy more "quality pubs through piecemeal and innovative corporate acquisitions". Say what you like, but at the end of the day many of us took that to mean Spirit.

While the poison pill that is Spirit's complex finance structure is expected to make the unravelling of its estate a nightmare, it wouldn't be impossible.

As the Spirit-imposed deadline of November 21 for interested parties to show their hand approaches, and while the likes of Mr Tchenguiz and Ms Saunders marshal their not inconsiderable forces, Punch is likely to be in there until the death. If it has to walk away empty-handed, its own remarkable growth spurt will be severely curtailed.

With future mega-deals looking less likely, as consolidation in the kind of portfolios Punch is interested in matures, one feels this is one transaction that Mr Thorley is not prepared to let slip through his grasp.

What the brokers said

  • "The Pubmaster and InnSpired estates are showing promising margin and profit growth, [meanwhile] we believe that the expectation of a major deal has now been removed from the Punch rating. So from here, either Punch buys a chunk of Spirit and the forecasts go up, or someone else does and the valuation shifts up a notch. Either way we believe Punch represents an attractive opportunity."
    Geof Collyer, Deutsche Bank

"Given Punch's strong fundamentals, potential for earnings upgrades and further positive newsflow over the coming 12 months we believe a 2006E PER rating of 12.6x is justified."
Ian Rennardson, Merrill Lynch

"Punch is exploiting one of the best opportunities in licensed retail, by developing residential pubs for which there is pent-up demand for eating out. With 30 per cent of the estate being food-free, there should be a substantial development pipeline to drive organic growth over the next three years."
Douglas Jack, Panmure Gordon

"Competition is increasing for Spirit and there is a risk that this deal is unlikely to happen for Punch. We remain supporters of the Punch business model, but we think that there could be some disappointment in the short term if it does not succeed in acquiring some of the Spirit pubs."
Melanie Sharp, Arbuthnot

"Even without Spirit we think Punch is cheap (11.5x 2006F PER), defensive and offers double digit EPS growth which it will add to through acquisitions, be they Spirit or others."
Nick Thomas, ABN Amro

"We believe that a consistent recycling of assets, along with re-investment within the estate, will ensure consistent double-digit growth in earnings over the medium term."
Richard Carter, Numis Securities