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16 Monday 12/07/10 thePublican This WeekCity & Business PUNCH ‘ENCOURAGED’ Shares in pub giant rise as it confirms recent trading has been stronger


By Hamish Champ hamishc@thepublican.com


SHARES IN Punch Taverns rose last week as the group said it was on track to hit its annual trading forecasts. And as well as relatively positive trading the group’s finance director Phil Dutton said Punch’s covenant position was assured.


Despite some City analysts taking a relatively dim view of Punch’s latest interim management statement, shares in the debt-laden pubco rose more than five per cent as it outlined like- for-like sales growth in recent months. “Despite poor weather in January, recent trading has been good in both the leased and managed pub estates,” said Dutton. The World Cup had been helpful, he added, but he pointed to certain “management actions” which had brought about greater stability. “On the leased side we’ve invested around £45m in more than 800 pubs. We’ve increased the proportion of our pubs on substantive leases from 82 per cent to 84 per cent. And we’ve


Chef & Brewer is one of two brands Punch plans to refurbish this year


absorbed brewers’ price rises, while the number of pubs being returned to us is about half what it was last year,” Dutton said, noting that some 1,000 pubs “failed” last year.


Lettings to new tenants had also outweighed pub failures, he added. Average outlet earnings before interest, tax, depreciation and amorti- sation (EBITDA) was down five per cent “benefiting from estate churn”, Dutton said.


Across the managed estate Punch will have invested around £50m over


the course of the year, with pro- grammes to refurbish two concepts, Fair & Square and Chef & Brewer, expected to be “substantially com- pleted” by the year-end.


Punch continued to tackle its debt, Dutton said, reducing gross debt by £664m – 16 per cent – boosted by pub disposal proceeds of £263m, while net debt stood at £3.2bn. The group would be looking to raise £300m in total over the course of the year, he said. Dutton said the group would con- tinue to look to reduce debt in line with the decline in profitability of the three securitisation vehicles, Punch A, Punch B and Spirit.


“The cost of the support for these structures might rise but we’re confi- dent the action we’ve taken, and will continue to take, will give us enough headroom to enable us to meet our financial covenants going forward.” Punch would not be in a position to pay shareholders a dividend for another two or three years due to funds being ‘trapped’ under the terms of the securitisations. However, Dutton stressed that


‘Irrespective of your business’s size or industry sector, it faces significant risks at every stage of the economic cycle. The key to managing these risks is to understand what they are’


Bianca Dexter-Burnell: It’s all about how you manage the risk


Sound risk management is clearly important during a recession. But experience shows that many com- panies actually run into financial difficulties during the upturn, as they stretch themselves in search of renewed growth. So it is vital for the management of licensed trade companies to keep a firm grip on risks as economic conditions improve. Two types of risk are currently


particularly front-of-mind for our clients. One is market volatility – and it’s not hard to see why. Since late 2007, the pound-dollar exchange rate has swung between US$2.11 and US$1.35, the UK’s base interest rate has fallen from 5.75 per cent to 0.5 per cent, and oil has traded in a per barrel range of US$39 to US$144.


The other risk area is that of


refinancing. Our analysis of the loan market for UK corporates projects a peak requirement for refinancing in 2012.


With auditors increasingly


wanting evidence of access to finance going forward, many com- panies will want to start examining their refinancing options this year. Both of these risks can have major impacts. Market volatility on the scale described above – if left unmanaged – can turn a profit into a loss in a matter of days. And failing to refinance on suitable terms may put a business’s very future in doubt. So, how can licensed trade companies mitigate these risks? With market risk the answer lies first in structuring your business to reduce the impact of market movements. At a basic level, this


might include natural hedges such as sourcing supplies from the business’s main export markets, or building in operational flexibility to ramp capacity up and down. Many companies reduce their risks further by buying hedging products, which provide protection against markets moving the wrong way.


Examples include swaps or


forwards, which fix the rate payable and involve a commitment for the maturity of the trade, and options which give buyers a known worst case rate without any commitment other than the initial premium cost. All these products are under- pinned by ‘derivatives’ – which have attracted negative comment in the press, but which remain a valuable tool when used properly. Hedging can also create additional business


opportunities beyond risk manage- ment of existing activities. For example, those pub companies which are heavily reliant on import- ing stock may use an option to lock in an attractive foreign exchange rate and price your products accor- dingly, with the confidence that if the business doesn’t materialise, there is no further commitment and could even sell back the option. Irrespective of your business’s size or industry sector, it faces significant risks at every stage of the economic cycle. The key to managing these risks is to under- stand what they are, and then to take considered, prudent steps to protect against them.


Bianca Dexter-Burnell is head of licensed trade at Barclays Commercial Bank


money could still be invested in the group’s pubs. “Leading shareholders are tremendously supportive of what we are trying to do,” he added. Looking ahead Dutton said the economic outlook would demand the group be cautious with its financial plans.


Some City analysts were encour- aged by Punch’s update. Greg Feehely, of brokers Altium Securities, said the cash resources of the group could offer the headroom necessary to reposition and restructure the busi- ness. “This is a key positive for us and the main reason behind our (admit- tedly high risk) ‘buy’ recommenda- tion on the stock,” he said. Others were more cautious. James Dawson, an analyst with City broker Charles Stanley, said that “improved trading performance will take time to materialise”.


Dawson added that any volume stabilisation “will be offset by the rebasing of the rental levels across the substantive estate, an exercise which is likely to take a further 18 to 24 months”.


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