Punch - The last will be the first.

All,

Please find our updated analysis of Punch here.

Before the pandemic, who’d have thought that Punch would do better than Stonegate these days? It’s (almost) always been the gastro/destination/bar/entertainment estate that generated better margins and, consequently, better growth. However, the portfolio of unbranded local pubs has shown just how price-inelastic UK beer demand can be. On our metrics, the company is not quite out of the woods, but it is far enough on the way.

Investment Considerations:

- Punch bonds are trading at 7% YTC towards a refinancing in a few months. We are not buying 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 interest coverage remains tight into the refinancing this summer.

- Among the two HY-issuing pub companies in the UK, Punch are the weaker without a doubt. But in an inflationary or low Consumer Confidence / Disposable Income environment, the wet-led high L&T exposure benefits from being more engrained in people's everyday lives (inelastic demand) and thus allows for better pass-through of altogether milder cost inflation than what the food-serving managed pub estates are exposed to.

Interest Cover:

- We still don’t like the very low FCF/Interest Cover of a mere 1.2x and not really improving on our metrics. We’d prefer ratios closer to 1.5x.

Asset Cover:

- However, the company owns 92% of this fabulously stable real estate, which is higher than average for large pub companies. The high valuation of the estate increases the company’s attractiveness significantly.

- Still, the estate as it is on the balance sheet today is overvalued. The company only revalues 20% of the estate every year and so there should be at least 60% of the portfolio still valued on metrics from before inflation and rates took off. We make a £50m adjustment.

- On that basis, bondholders are fully exposed at 70% LTV today. If we compare this exposure to REITs today, Punch doesn’t look far off.

Next events:

- We expect the company to show positive Q225 LfLs in May on the warm weather we have had recently and then to wait a month before launching the refinancing following the step-down to par of its call protection at the end of June.

Looking forward to discussing this name with you,

Wolfgang

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