(PUB) Punch Taverns

Big drop today. Anyone know why?

Spirited away
Created: 3 August 2011 Written by: Algy Hall
http://www.investorschronicle.co.uk/Companies/ByEvent/MergersAndAcquisitions/Analysis/article/20110803/1d25fbb4-bdd1-11e0-9114-00144f2af8e8/Spirited-away.jsp

Punch Taverns, the company that became synonymous with corporate borrowing excesses prior to the credit crunch, has split itself in two in an attempt to break from its past creating a growth business and a debt-encumbered asset play. But even after the split there are a number of issues faced by both new companies.
The part of the company retaining the Punch name comprises about 5,000 tenanted pubs that are struggling to keep up payments to bondholders. Such are the financial strains that some analysts have found it hard to ascribe any value to the shares, which currently trade at 11.75p.
Conversely, the Spirit Pub Company looks of most interest from a conventional investment point of view. The plan for Spirit, which has 803 managed pubs and 549 leased pubs, is to improve performance by increasing food sales while selling off up to 450 underperforming leased pubs and converting the rest of the leased pubs into managed ones. On the face of it this looks like a promising strategy, especially as the group has several well-established eating-out brands, such as Chef & Brewer and Fayre & Square.
The logic behind Spirit's plans was highlighted by a report this week from property consultant Jones Lang La Salle which found that 63 per cent of pubs that sell food increased sales over the last year compared with reduced sales at 66 per cent of drink-focused pubs. What's more, broker Panmure Gordon points out that Spirit makes significantly less profit per pub than its peers, which suggests there's plenty of room for improvement.
But Spirit also faces a number of legacy issues from its former incarnation. For example, its bondholders will need to approve the disposals that its strategy hinges on. And while the group has ambitions to start paying dividends next year, cash flows are expected to be weak. Broker Morgan Stanley expects a free cash outflow of about £25m in each of the next two years due to high capital expenditure, rising interest charges, tax and heavy use of the group's £83m provisions to absorb losses from its troubled leased pubs.
There has also been a recent souring of sentiment towards food-focused pub groups due to the worsening economic outlook. Mitchells & Butlers, for example, has seen its shares plummet 19 per cent to 258p over the past month.
IC VIEW:
FairlyPriced
The market is going to take some convincing of Spirit's merits and at 50p the shares look fairly priced.

Punch and Spirit face contrasting prospects post-demerger, says Citi - http://t.co/qY2EFvq

1:15 pm by Kam Patel

The split leaves Punch focused on mainly tenanted pubs, which are typically run by publicans who pay the owning company rent and rely on it for their beer supplies
Punch Taverns (LON:PUB) and Spirit Pub Company (LON:SPRT) are now trading separately following completion of a demerger. Citi analysts believe there is a sharp contrast in their prospects, with the tenanted pubs-focused, debt-laden Punch set for a much rougher ride over the near to medium term.

Punch Taverns formally announced plans to demerge Spirit Pub Company on July 7 – a move designed to unlock value and help it deal with its £2.5 billion-plus debt pile, built up through a flurry of highly leveraged acquisitions during the credit boom.

The split leaves Punch focused on mainly tenanted pubs, which are typically run by publicans who pay the owning company rent and rely on it for their beer supplies.

The Spirit Pub Company, meanwhile, will focus on managed pubs, although it does have some pubs under leasehold as well.

The managed pubs sector, where the estate is run directly by the company and generally have greater freedom on pricing, has fared best during the recession. Spirit’s estate includes Chef & Brewer, Flaming Grill, and Fayre & Square.

James Ainley, analyst at Citi, rates Spirit a ‘buy/high risk’ with a target price of 85 pence. He reckons management has presented a “credible turnaround plan” for the business and is forecasting 7-9% per annum growth in earnings before interest and tax (EBIT).

On the basis of his valuation, Spirit is trading on a “significant discount” to peers and longer-term upside remains from using over £100m of cash it came away with to begin life as a separate entity.

Ainley is convinced Spirit has strong earnings growth potential, with scope for closing a sales and margin gap versus peers. Spirit’s refurbishment capex plans, amounting to £35-40 million per annum, with return on investment (ROI) estimated at 25 per cent, should help it close this gap, he says.

The analyst notes that Spirit is already delivering results on this front, with recent evidence of improved operational performance at the business, specifically a 5.7 per cent growth in nine month like-for-likes and first half EBIT margins revealed to have risen 80 basis points.

While Spirit is mainly focused on the more desirable managed pub business, post-demerger it still has some exposure to leased properties. Indeed around a third of its earnings before interest tax, depreciation and amortisation (EBITDA) will initially come from leased properties.

Ainley, however, points out that this leased estate with Spirit’s portfolio comprises higher-quality, formerly managed houses.

Furthermore, the company has plans to reduce exposure to the leased sector, with a combination of conversions back to managed (25 per annum) and disposals (25 per annum) meaning that the proportion of the Spirit group comprising leased properties should fall to less than 15% in four years time.

The Spirit stock trades on a forward 2012 multiple of 8.2 versus 10.7 for sector peers, further underlining Ainley’s view that the shares look undervalued at the moment.

Punch Taverns is also rated a ‘buy’ but on a ‘speculative” basis, with a target price of 25 pence.

The company has an awful lot on its plate over the next few years, not least avoiding defaulting on its mountain of debt. Ainley cites the “significant uncertainties around the operating performance, high levels of leverage and risk of covenant breaches” as major reasons for his speculative stance.

That said, he calculates that the group is trading at a significant discount to actual potential value locked in and that there could be upside: “We see do potential value in the shares. However, realising that value may not be straightforward and co

Cheaper still now me old china LOL !!!!!