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 Limited, Formerly Punch Taverns plc, is a United Kingdom-based pub company. The Company is engaged in the operation of public houses under the leased and tenanted model, which involves the granting of leases to tenants operating the pub as their own business, paying rent to the Company, and purchasing beer and other drinks from the Company. The Company's segments include Core and Mercury. It has a portfolio of approximately 2,580 pubs in the Core division and over 690 pubs in the Mercury division. The Company also operates public houses under the retail operating model. The Company has approximately 110 pubs trading under retail contracts. The Company's pub categories include Community Pubs, High Street Pubs and Destination Pubs. Its pubs include Arkwrights, Black Horse, Coach and Horses, Bulls Head, Cedar Inn, Cross Keys, Castle Inn, Saracens Head, Stanley Arms, Travellers Inn, Travellers Rest, Bronte and Blacksmiths Arms, among others. more »

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J D Wetherspoon plc owns and operates pubs throughout the United Kingdom and Ireland. The Company aims to provide customers with food and drinks. The Company operates a trading estate of approximately 926 pubs. The Company operates over 40 hotels and approximately 900 rooms. The Company's hotels include George Hotel, the Shrewsbury Hotel and the Unicorn, Ripon. The Unicorn, Ripon consists of over 32 bedrooms in North Yorkshire. Its hotel rooms provide unlimited free wireless fidelity (Wi-Fi) as standard and its staff member provide assistance around the clock. The Company's hotels have adjoining pubs, serving breakfast menu and Wetherspoon dishes, and club nights. The Company offers a range of food, such as burgers, desserts, steaks, and salads and pastas. Its food menu includes Breakfast Club, Deli Deals, Small Plates, Sharers, Burritos, Pub Classics, Fresh From The Grill, Chicken and Ribs, Burgers and Dogs, Sides, Mexican Monday, Steak Club, Chicken Club, Curry Club and Fish Friday. 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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