Punch Taverns Share Discussion Threads

[timbo003] 23/12/2009 20:43

Ian

Captain Oates never came back, I bet (hope) you do!

Besides which, it's not that cold out there.

[jeffian] 23/12/2009 20:04

No, I worked for one of the smaller regionals taken over by ETI.

DD,
I agree you can't argue with the chart as an indicator of what the market 'thinks', but I don't accept it as evidence that the business model "is fundamentally flawed". Had ETI used their surplus cash of £1bn over the past few years to pay down debt rather than buying back their own shares they would have no bank debt and be left with a self-amortising mortgage over a lengthy period (which is where PUB now claim to be). What is so "flawed" about that? It's the way most of us run our lives! Last time (1990's), what caught out the over-geared was the massive rise in interest rates which meant that the interest became unserviceable and resulted in forced sales into a falling market and massive asset-value destruction. PUB & ETI protected themselves against this by fixing their long-term interest rates with considerable headroom to protect themselves against falling income which is why, even in today's dire trading conditions, they can still easily service their interest bills. In the wider market it hasn't happened either because with mortgage rates at historic lows there is no pressure to sell which is why there has been no collapse in house prices despite unemployment, short-working etc. (though one could foresee a bloodbath there if interest rates rose unexpectedly!). Lord C's view of the banks is supported by plenty of evidence but, whilst they are certainly screwing their customers, they seem to have accepted it's in no-one's interest to actually foreclose which would result in a flood of assets onto the market, a collapse in prices and even greater write-offs then they have already taken. As stated, PUB do not have any bank debt now and that is why ETI are running around now paying off 'cheap' bank debt rather than considerably more expensive securitised debt, so they don't get legged-over too badly in the refinancing negotiations due 2010/2011.

For many years from 1995 onwards, the market 'thought' ETI was worth a single-multiple PER. It then finally noticed that they had produced compound growth in earnings well in excess of 30%/year for around 12 years and re-rated it to a maximum of around 18x at its peak (a 30-bagger for original holders!). At the low last January they 'thought' it was worth a PER of 1x. So I'm not prepared to accept that what the market 'thinks' is evidence of anything!

Have a happy Christmas. I'm going to stop boring you all now and go off for a drink. Like Captain Oates........I may be some time!

8-)

Regards, Ian

[careful] 23/12/2009 18:33

jeffian, did you actually work for Bass or PUB if you do not mind such a personal question.

[desperate dan] 23/12/2009 18:22

Enjoyed catching up on those posts today.

Jeffian, your points are well made and constructed. Thanks for the detail, but ...

... as we all know, the world (in financial terms), is a totally different place than that of 18-24 months ago. The accounting analysis "fashions" (as you so quite rightly describe), have changed - basically but succinctly summarized by Lord C in 1079.

I repeat my position that the PUB business model that was apparently so appealing in recent years is now seen somewhat as a pariah of the investment funds - and is fundamentally flawed.

Don't take my word for it - just have a look at the share price chart.

My best wishes to you for a Happy Christmas.

[jeffian] 23/12/2009 17:42

lagosboy,
Don't take any notice of me; if I was that smart, I'd have sold at £14 wouldn't I?! I just couldn't get my mind round the market's attitude to debt (still can't really) and it never occurred to me that the market would take the shares of a company with eps over 30p to 39p (as they did with ETI). I do hold these, but only because the pitifully small amount left is worth a punt on recovery.

[lagosboy] 23/12/2009 17:13

jeffian

I respect your view and your depth of knowledge. I expect a very tough year for all retail/discretionary spend next year. Igf you are long I hope the worst is over for you. I shorted prior to the trading update and for the moment I am out.

At 50 pence I will look closely again, as I agree, a turnaround might be possible from those levels. These companies also tend to get passed around due to their cash generation potential, so I would also not rule out private equity interest at some point.

Top of the agenda for Punch should be recruting a new CEO.

[jeffian] 23/12/2009 16:37

lagosboy,
Don't get me wrong; I'm not arguing this company is in anything other than difficulties nor that it is a great investment, I'm just saying it ain't going to go bust. Re: the points in your 1078
* I don't "wish to re-check your figure" of 260p/share NAV because that is the figure in the published accounts. If you don't like intangibles etc (fair enough) it may be something else. You say £1.67. Either way, both figures are well north of the current share price (67p) not "it must be south of the current share price" as you previously said.
* Whichever way you look at it, it is not "haemoraging cash", it is generating it. The £2m/month support it gives struggling tenants is neither here nor there out of EBITDA over £500m and (fixed) interest takes £300m. You may argue about what they do with the net cash (investment or repayment of debt) but you can't argue that it is there to give them the choice!
*As you know, there has been much questioning recently of pub valuations - both rental and capital. Yes, the formula for valuing pubs does apply a multiple to income and, yes, both incomes and multiples have been falling, but in the end property is worth what someone will pay for it and the wonderful thing about it is that it usually has some residual value. A closed pub is not worth £0, which is what you would get if you blindly applied any multiple to £0 income! (I say this as a former brewery Property Director - we used to reckon that the fallback position for an unviable country pub was 3 plots - pub, beer garden, car park - and that didn't work out far wrong in most cases). You are not alone in believing that the pubco's should be writing down the value of their estates harder, but the truth is that both PUB and ETI have sold literally hundreds of their pubs recently at or near to Book Value and the valuers and auditors will be having regard to those sales in agreeing a value for the retained estate.
* Response to your last point about "banking covenants" the same as to Lord C. A breach of covenants in the securitised bonds not the same - it does not lead to harsher terms but to cash being locked into the vehicle for the benefit of bondholders rather than passed up to PUB. A Rights Issue would make no difference - they've been using the proceeds to buy back discounted bonds and cancel them thereby reducing overall debt but unless they repaid the whole troublesome bond the problem would still remain - so why do it? The reason they did it with the Convertible bonds was that at current share price, conversion would have had a hugely dilutive effect.

Look, I'm not saying this is anything other than a dog, but there is a lot of money to be made on dogs as the past few months has shown. I leave you with this thought; if Quantitive Easing is simply another phrase for 'printing money' and, whatever they say, the Govt are trying to inflate their way out of repaying their humungous debts, highly geared companies with real assets (e.g. property) do very well in inflationary times. Ummmmmm, now can we think of such a company............?

8-)

[jeffian] 23/12/2009 15:49

I don't disagree with your comments about banks, Lord C, but PUB doesn't have bank debt. "All of our debt is long-term securitised debt which has an average life of 18 years and is secured on over 7,100 pub properties. The securitised debt amortises over periods extending up to 26 years."

[lord c.] 23/12/2009 14:41

I am probably the oldest contributor to this thread.
During all my time in business I have never known banks behave as badly as at present. All previous relationships and codes of behaviour have gone.Rebuilding their balance sheet is paramount.Sod the customer(good or bad) and make him pay pay pay is the new game.
Nothing matters to them now except to find any excuse to renegotiate existing arrangements. Suddenly finance directors are re-reading the small print in their loan agreements with much trepidation as any infringement is going to result in a huge hike in interest rates plus outrageous fees.
Breaking covenants is going to cost PUB dearly.

[lagosboy] 23/12/2009 13:28

jeffian

The net tangible asset value is indeed £ 1.67 share. You may wish to re-check your figure.

I think £ 500million of debt is significant. My point about haemoraging cash is in reference to the money being diverted to support non performing pubs and on refurbishment, much of the estate is very tired due to servicing of high debt level.

Look at the bigger trends:

Margins have fallen by almost 50% over the last 4 years
Pubs are not central points for communities any longer
Impact of supermarkets
Smoking ban
Poor management as recent renumeration fiasco confirms. This company has been a pass the parcel and the shrewd guys are long gone.


Properties, I believe are over valued. They should be priced off yield which in turn is dependant on underlying profitability of the host business (pubs). This is falling quite rapidly across the estate.

Someone also seems to think that the cpompany can reverse cherry pick the worst pubs. In a buyers market I am afraid it does not quite work that way.

Standard Life 'reduced' their holding below the 5% thereshold.

Debt/performance will put pressure on bankong covenants, Rights Issue is likely and will also wipe the slate for current/new management.

That's my view.

[careful] 23/12/2009 09:19

i think that share buybacks do work for executives.
they increase return on capital employed, often a criteria for bonus payments.
(ref your comments about 'cash is inefficient' earlier.

no good for shareholders though.

[jeffian] 23/12/2009 09:08

Agreed absolutely, HA. I'm particularly upset about the ETI thing because I went to the AGM where they first proposed a 'return of cash' to shareholders via this method and argued against it. If you want to return cash to (all!) shareholders, you can increase the dividend, pay a 'special dividend' or make a one-off return of capital. By buying back shares in the market, a few sellers benefit and the theory is that the remaining holders will see the value of their shares rise because EPS is boosted mathematically by dividing the same amount of profit between less shares in issue. Ha! Well one only has to look at the graph to see what happened! I've rarely, if ever, seen a share buyback that worked and I'm amazed that there are still companies out there doing it and shareholders accepting it. Rant over.

[hamsterape] 23/12/2009 08:36

In ETI's case this is particularly annoying because a) they wasted £1bn over the past few years buying back their own shares at inflated prices when they could have paid off all their short-term debt and b) they're now committed to paying off overdraft saving themselves 3% pa when they could have bought in their 6.5% bonds at 40p in the £ a few months ago (effectively saving themselves 16.25%).

Companies seem to be particularly bad at trading in shares, especially their
own. How many times have we seen companies with a decent cash pile buy back shares which then continued to fall in value to a fraction of their bought-back price and of these how many had to later issue more shares at a much lower price to pay back debt?

[jas_ron] 23/12/2009 07:09

good posts above - whether sober or not! going to pick up a few more this morning. has a lot of potential, small increase in margins on their massive turnover will boost the bottom line. has some valuable property and cash generative although debt a concern but coming down. easily double from here over 6 months on any positive surprises.

[jazza] 22/12/2009 23:24

lols.

my apologies, it's just that, compared to some of the bull you read hereabouts, your drunken (?) chatter seems stone-cold sober..

:-)

[jeffian] 22/12/2009 23:14

jazza,

"its good to get a sober, balanced view amongst all the hysteria."

It's 23.14. Not necessarily "sober".

8-)

[jazza] 22/12/2009 23:05

lols...your "edit" beat me to it jeffian.


At times like these, I think to myself thus:


a) Desperate Dan's thinking is flawed.
b) Desperate Dan's thinking mirrors the market perception/share price action.
c) Therefore the market's thinking is also flawed.

:-)

[jazza] 22/12/2009 23:04

jeffian,

Keep the well-informed posts coming, its good to get a sober, balanced view amongst all the hysteria.


The attitude to debt that is all pervasive in the markets is perverse, you'd think debt, gearing and liabilities had never existed before now...and the stock assumption is that debt CANNOT be repaid/rolled-over (how daft is that?).

As for DD's lame assertion that there is a fire-sale going on - I guess he's not been looking too hard at the sums realised vs the book-value of said assets.

[jeffian] 22/12/2009 22:45

Hi, DD,

I have a bee in my bonnet about debt. It's a question of fashion. Several years ago, the market decided that an 'efficient' balance sheet required a degree of gearing (famously taking GEC from a cash-rich company with £1.2bn to the bust Marconi). It's now decided debt is a 'bad thing'. Why? Debt which is manageable and serviceable is a perfectly valid business model and is the basis on which most of us buy our houses. If you borrow £X and undertake to pay it off over 20/25 years at £Y per year, there is no problem. There is only a problem if either a) you stop earning the income to make the repayments (not the problem with the pubco's) or b) the lender asks for it back tomorrow. It is the latter that worries the market - if cash-strapped banks simply can't roll over the short term loans and when companies ask to continue their overdrafts the bank says 'no'. What this has done in the case of PUB and ETI is to make them rush to pay off their short-term debt as soon as possible. In ETI's case this is particularly annoying because a) they wasted £1bn over the past few years buying back their own shares at inflated prices when they could have paid off all their short-term debt and b) they're now committed to paying off overdraft saving themselves 3% pa when they could have bought in their 6.5% bonds at 40p in the £ a few months ago (effectively saving themselves 16.25%). Grrrrr! Anyway, the point is that PUB have now paid off all their short-term debt and are only left with the 'mortgage' (which they can service perfectly well), so there is no question (IMHO) of them going bust because there is no requirement within the securitisation for early repayment.

(Edit: btw, DD, ref 1068 I don't agree that pub sales have been at "fire sale" prices or that "there have only been a limited amount of buyers who can cherry pick and basically name their own price." The PUB disposals have either been at, or at a small discount to, Book Values and when Fullers bought half a dozen London pubs they complained (I can't find the exact quote) that they had to pay 'rather more than they wanted to' to get pubs of this quality. There is plenty of demand for good pubs but there is no demand at all for bad pubs and these are hanging around or being knocked out for alternative use.) The pity is that current circumstances are forcing PUB and ETI to sell good pubs they would rather not just to pay down debt.

[desperate dan] 22/12/2009 22:21

Sorry careful, from where you get your information, I know not.

There has been a wholesale disposal of their prime locations at knocked down (approaching fire sale), prices - simply because there have only been a limited amount of buyers who can cherry pick and basically name their own price.

[careful] 22/12/2009 22:09

come, come the 'family silver' represents a tiny number of the assets.
and punch have tried to retain the best pubs.
far from being down to the brasses, the best stuff has not been sold.

a few ounces of brass have been sold, there are tons of silver left.

[desperate dan] 22/12/2009 21:38

Good posting jeffian. Your comments have more substance than most broker's notes.

I would however question your assurance of the company's survival.

The business model and degree of leveraging was fine (if somewhat questionable), in good times (even then it relied heavily upon a shored up balance sheet). In times not so good the model does not hold water - whatsoever.

The forseeable future shows no appreciable recovery and survival is now beyond their own control, being entirely in the hands of others. The family silver is gone in the attempt to survive. Only the brasses are left and there are no buyers of brass in the market. Even a fire sale value would be limited. The balance sheet is absolutely dire. Result: very limited value asset strip, hence the share price where it is currently positioned.

Having said all that, there will likely be a bounce opporunity - strictly in the short term, probably approaching early Spring.

[jeffian] 22/12/2009 21:06

That's not a great example, fjgusto; they crossed the 5% barrier going South, not North (they now have 4.94%)!

Otherwise, I agree with your sentiments. It is short-term bank finance that has been the problem; the long-term securitised debt - like a 25-year mortgage on your house - is paid off over a fixed period and is not going to bust the company. Why would they inflict a dilutive RI on their shareholders? In fact, if poor sentiment continues to hit commercial bond values, they can go on buying their debt back at less than £1/£1.

My view is that there is no doubt the company will survive, and probably without the need to raise further capital. The question is why would you buy it while profits are declining and dividend suspended? Stabilise profits and reinstate an affordable divi (2.5/3x covered?) and, hey presto, we have an investment again. When? Don't ask me!