Punch Taverns – A second and more detailed look

Tuesday, Jul 05 2011 by
Punch Taverns  A second and more detailed look

The first company that I am going to look at in the pub sector, after building my view of the industry in the previous two posts, is Punch/Spirit. As the company is planning a spin-off of its managed pub business, Spirit, I will look at each business separately. Unfortunately, we also have to conclude that the previous financial statements are completely useless going forward as the industry is going through changes which alter the fundamentals entirely. There are many dimensions to these changes but the most important changes are in the leased pub sector where, I believe, drinks income will, relative to current conditions, cease. I originally anticipated that this would be unrelated to the asset sales but after some help from people in the industry I discovered that they were linked. The result is that a debt restructuring is certain as is more impairment of property. However, this is all for later. I will first discuss the managed business.



Spirit’s Managed Pubs – Above I have reproduced those tables from my look at the managed pub industry. I think one misconception about the spin-off could be that we are separating a good from a bad business. From the above tables it is pretty clear that, in fact, it is a separation of a bad business from a terrible business. In particular, we see that its margins are really quite worrying. Furthermore, we get a breakdown of the assets employed in the managed business meaning the pre-finance, pre-tax ROE is around 4.7%. Indeed, considering that Spirit will be carrying around £900m in debt it seems likely that the actual net profit figure would be really dire.

Looking at margins more closely, PUB has operating margins of 7%, Greene, Marstons and Wetherspoons have 13% and M&B has margins of nearly 17% (Young’s perhaps isn’t comparable but has operating margins near 20%). It is always difficult to work out what is going on with margins as it isn’t broken out in detail for most of these companies.

The first thing is that it can’t be anything to do with the scale of the business. While M&B may have lower costs through its large number of stores, we can see that…

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Punch Taverns plc is a United Kingdom-based pub company. The Company is engaged in the operation of public houses under the leased model, which involves the granting of leases to tenants operating the pub as their own business, paying rent to the Company, purchasing beer and other drinks from the Company, and entering into profit-sharing arrangements for income from leisure machines. The Company's segments include core estate and non-core estate. The Company is an operator of leased and tenanted pubs. The Company's pub categories include Community Pubs, High Street Pubs and Destination Pubs. The Company's pubs include The Study Room, Lancaster; The Old Volunteer, Nottingham, and Chequers, Bilton-in-Ainsty. The Company operates approximately 3,590 pubs located across the United Kingdom. The Company operates approximately 30 pubs under the Retail contract. The Company has a property portfolio consisting of over nine million square feet of ground floor gross area. more »

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J D Wetherspoon plc owns and operates pubs across the United Kingdom and Ireland. The Company operates hotels. The Company owned an estate of around 951 pubs. The Company also offers food and drink services. The Company's hotels include Guildhall and Linen Exchange, Dunfermline, and Hippodrome, March. The Company's Hippodrome hotel offers approximately 13 en suite rooms. The Company's pubs include the Ivy House, the Velvet Coaster, the Bloxwich Showman, the Dairyman, the White Horse, the John Fairweather, the Saxon Crown, the Crowborough Cross, the Great Wood, the Forty Foot, the Saltoun Inn, the Lord High Constable of England, Hedgeford Lodge, the Angel Vaults Inn, the Star, the Chief Justice of the Common Pleas, the Old Unicorn, the Picture House, the North Western, the Sir John Hawkshaw, the Sawyer's Arms, the Twelve Tellers, the Steel Foundry, the Golden Hope, the Pump House, the Windmill, the Old Borough, the Queen's Head Hotel, the Jolie Brise and the Ritz. more »

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  Is Punch Taverns fundamentally strong or weak? Find out More »

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About valuhunteruk


I'm a private investor based in the UK. I run Valuhunteruk a value investing blog started in March 2011 which is a continuation of a private blog I have been running since mid-2010. I publish the research and key ideas behind my decisions and the performance is tracked in a portofolio. more »

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