Punch - Post Inflation

All,

Please find our updated analysis here.

As stressed / distressed investment Punch is past its prime, again. The company should be able to refinance at will as soon as Fortress feel the market won’t get any better while keeping an eye on the call protection still on the bonds. We are keeping an eye on the name, however, as retail remains under pressure from persistently weak consumer confidence and considering the reemergence of inflation in the US - a precursor of things to come here?

Investment Rationale:

- Punch bonds still yield a respectable 7% on a good day. We are not taking any of these bonds here as the portfolio is looking to earn a mid-double-digit return, and the company remains solid. We are however maintaining coverage for now as continued weak consumer confidence could have a negative effect bringing this yield back again to a more interesting magnitude. 

- Among the two HY issuing pub companies in the UK, Punch are the weaker one without doubt. But in the inflationary environment, the wet-led high L&T exposure benefits from being more engrained in peoples' everyday lives and thus allows for better pass-through of altogether milder cost inflation than what the food-serving managed pub estates are exposed to. 

No more organic growth:

- Yes, there will still be some growth, but the main driver from last year - inflation - is behind us now. 

- From here on, EBITDA growth will have to be primarily earned the hard way, from pub conversions. Management have promised 70 conversions over the next three years - some of which we have already seen in the first six months since this number came out, but this number should be back-loaded towards 2027. 

- Punch bought 18 pubs for €22m in Q125 (16 weeks to December) for a 7.85x multiple. This is only a slightly accretive acquisition on our math, but perhaps there are some pubs in the portfolio that lend themselves to a conversion later.

Index and Volatility:

- From here, the primary indicator for revenue growth and development should be the CGA index. The company should grow and breathe in close proximity to the general drinks development in the UK.

- This positions Punch, however, as a higher beta (not generally a high beta) derivative of UK drinks consumption, which itself could suffer if the UK economy, disposable income and consumer confidence are not improving. 

- Moreover, the labour government has just saddled the hospitality industry with yet more NIC contributions, while reducing business rates relief. 

So we do think there is potential for Punch to deteriorate a little - perhaps only after a new bond issue, but in the foreseeable future. We are therefore keeping an eye on the name and look forward to discussing it with you again then.

Off to the pub, 

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk