Punch - 2024 and beyond

All,

Please find our updated analysis of Punch Taverns here.

All good things must come to an end. In the case of Punch Taverns though we’ve missed it. The bonds always traded too tight for us and the opportunity is largely behind us now. Usually the weaker of the HY issuing PubCos, Punch are less exposed to demand elasticity with their overall more traditional estate. We look forward to the refinancing of this name in the summer. 

Investment Considerations:

- We have missed the Punch trade. The bonds have always traded a little inside of where we would have been ready to own them and now that rates threaten to tighten this summer, the refinancing has become a mere matter of time. 

- Among the two HY-issuing pub companies in the UK, Punch are the weaker one without a doubt. But in the inflationary environment, the 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. 

- We feel the bonds have gotten a little ahead of themselves, trading up to where they are now as cashflows remain tight, but the trajectory is certainly positive from here.

Q124:

- In Q124 the company appeared to re-enter a more normal trading pattern. Price rises had been flagged to come down and we are calculating a drastic halving of the previous 12% and 13% p.a. regime - assuming that volumes remained constant.

- We are not impressed with the £20m dividend Fortress paid themselves, but gauging bond levels, we seem to be the only ones who care. 

- The company has been tracking the model closely and the turnaround seems to be behind us. Beer inflation has been running in front of cost inflation, allowing for a substantial pass-through of costs. Going forward, management had indicated that further sales price rises would be harder to pass through, but we don't see the necessity for much more in the short term. 

Beer Inflation:

- The ONS measured 11% YoY inflation in December, but we are seeing Punch drop the pace of their price rises much faster. We are backing out some 7% YoY only. 

- Management have been signalling on the Q423 call already that price rises were now much harder to establish without dropping volume. 

- Assuming volumes only dropped some -1% in the December quarter (similar to the three months before, we think), cost increases shrunk to a mere -3%.

- We think that 2024 will be a year where Punch can reclaim some of the lost margin of 2022.

Here to discuss,

Wolfgang

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