Punch offers sober trading update

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A slowdown in food sales and patchy trading at its leased estate continue to depress profits at Punch Taverns, the pub group said on Wednesday, as it steps up its programme of financial support to struggling tenants.

And in spite of further progress in debt reduction and a 50 per cent increase in its target for proceeds from pub disposals, Britain’s largest pub owner remained downbeat on its trading prospects for the immediate future.

“Trading into this financial year has, as expected, remained difficult, and the challenging economic environment and our smaller pub estate will affect profitability in the short term,” the group said in a trading statement covering the 16 weeks to December 12. Shares in Punch fell 5.1 per cent or 4.2p to 77p in early trading.

Within Punch’s portfolio of pubs that it leases to semi-independent tenants, the company has increased its programme of financial support in the past four months, spending £2m a month in tenant support, compared with about £1.6m a month last year.

This leased estate of 6,841 pubs accounts for just over half of total group revenues but well over 85 per cent of operating profit, and the company’s tenants have been struggling in the recession, even as they remain tied in to contracts that oblige them to buy their beer from Punch.

The rate of tenants quitting their leases with Punch is now “materially down” on the level last year, although the company said that the leased division had nevertheless experienced a “similar” level of decrease in profit as in the last financial year, when operating profits at the leased division fell by 14 per cent before exceptionals.

The managed estate, where Punch pubs are run by direct employees of Punch, has fared better, with like-for-like sales down only 1.6 per cent compared with the same period last year. The group’s City Pub division, made up of premium pubs in prime locations in urban centres, saw sales growth of 6.7 per cent for the four months to December 12.

However, both the premium and value ends of Punch’s managed estate food pubs have suffered from the downturn in the dining-out market.

Having reduced net debt by £970m to £3.88bn last year, Punch trimmed its net debt further in the past four months, and net debt now stands at £3.35bn, a reduction of 14 per cent. Punch no longer has any convertible debt and the remainder of its debt has an average maturity of 18 years.

Punch on Wednesday also raised its financial target for pub disposals in the current year from £200m to £300m, after selling 352 pubs in the first four months of the year for total proceeds of £127m. Nearly two-thirds of these disposals, or 224 sales, came from Punch’s so-called “turnround division”, comprising its most underperforming pubs, with 114 from better-performing leased pubs and only 14 from the group’s managed estate.

“Punch’s debt reduction continues to impress but trading is not good and the management of decline is by definition finite,” said Mark Brumby at Astaire & Partners stockbrokers in a note to investors. “The group is pulling the correct levers but faces an uncertain future.”

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