Analyst: Time to buy Punch shares
City analyst Paul Hickman, of KBC Peel Hunt, has issued a buy note on Punch Taverns.
He based the recommendation on a turn-around within its managed division and the amount of unencumbered cash it holds.
He argues that "fortune favours the brave, and it's now time to buy back into Punch".
He said: "Punch has preliminary results on Tuesday 12 October. The results themselves are expected to be weak (Profit before Tax £130m, earnings per share 14.7p, down 59%), but the emphasis is now quite different.
"Its managed operation, Punch Pub Company, which forms the major part of the Spirit securitisation, has demonstrated that it is on a fast track to turn round performance, led by reinvestment.
"On the reasonable assumption that debt reduction has been concentrated in this securitisation, we estimate that Spirit (including its tenancies) has equity value of around £359m (56p).
"Punch now also has cash reserves of circa £300m (47p) at group level, free of securitisations.
"Admittedly, the company said at (in) July that it expects to need to contribute circa £45m per annum out of this cash into the Punch A and B securitisations (which include most of the tenancies) to keep them above default levels.
"However, we expect that cash upstreamed from Spirit, once it is out of cash trap during financial year 2011, should be broadly sufficient to maintain this level of unencumbered cash."
Bond structure
Hickman added: "We estimate that Matthew Clark, the drinks wholesaler, has value of c£45m (7p).
"There is a good argument that the £45m annual payment is really a cost for the bondholders.
"The alternative would be default for Punch A and B, which would result in the circa 5,500 pubs reverting to the bondholders.
"They would then need their own organisation to manage one of the largest pub estates in the UK. With the securitisations cash-trapped and close to default, they have little value to the equity holders for the next year or two.
"Therefore, effectively, the £45m is the price of retaining the current structure for the benefit of the bondholders. Our valuation does not take account of any such negotiation.
"Arguably, the bond structure as a whole needs to be renegotiated to justify its future in the group."
BISC Report
Hickman said the beer tie is still an issue. "The outlook for tenancy has changed fundamentally since the securitisations were written, particularly since the Business, Innovation and Skills Committee March 2010 report with its implications for the beer tie.
"We expect this whole issue to emerge onto the agenda following these results.
"These values need to be firmed up on the results. However, on the logic of the above outline, we believe the value of Punch is a minimum of 110p."
Hickman also contrasted the situation at Punch with Enterprise Inns. "Although Enterprise has a combination of bank debt, corporate bonds and securitised bonds, we do not believe it has the flexibility that Punch has potentially to exit any class of liability.
"Similarly, the company is fully exposed to the structural changes in the tenancy model, whereas at Punch the value resides in a combination of managed pubs and unencumbered cash."
