Punch - The last will be first

All,

Please find what is likely our last update of Punch here.

The trade got away from us last year as the bonds would always trade just a little tighter than where we were prepared to buy in. Ultimately it was a matter of The Last Will Be First… The quality of the estate, but in particular the low elasticity of British beer demand meant that the weaker company (compared to Stonegate) with a higher proportion of wet-led L&T assets performed better. We previously wrote that the refinancing is likely to come in H2 of this year, after the call step-down and stronger reported financials.

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 doubt. But in the inflationary environment, the high wet-led L&T exposure benefits from being more engrained in peoples' everyday lives and thus allows for better pass-through of an altogether milder cost inflation than what the food-serving managed pub estates are exposed to. 

- The company recently outperformed our more cautious expectations and investors buying into the name last year seem to have gotten it right.

Q224 Update:

- The Q2 results were positive. More Sales, more GM and lower Operating Expenses combined to £5m more EBITDA than we had modelled. After frugal WC management and stingy CapEx, FCF was £10m better.

- Consequently, the RCF is now "only" £25m drawn and liquidity is overall £10m better.

- Management suggested that this outperformance was planned and that the company intended to continue with this higher level of performance. We have slightly raised our projections.

Here to discuss,

Wolfgang

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