Merryn's Blog

Punch looks cheap – but don't buy

With the Footsie hitting its highest level in nearly 13 months, investors in most companies are probably feeling pretty chipper. But not everyone's happy. Investors in Punch Taverns, Britain's biggest publican, will be feeling more than a bit flat right now.

With the Footsie hitting its highest level in nearly 13 months, investors in most companies are probably feeling pretty chipper.

But not everyone's happy. Investors in Punch Taverns (LSE: PUB), Britain's biggest publican, will be feeling more than a bit flat right now. And they're not likely to feel like celebrating again anytime soon.

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Not only did Punch's pre-tax profits sink almost 40% to £160m in the year to 22 August, but the group has also wiped down the book value of its pubs by another £663m, i.e. by about 10%. That's very painful for a firm currently valued by the market at just £625m. So it's no surprise the shares tumbled 16% yesterday to 97p, 63% below the reduced net asset value of 260p a share.

Looked at it that way, Punch looks cheap. But its problems are three-fold. Firstly, business isn't exactly booming. Boss Giles Thornley says that "trading remains challenging and lacks visibility", which is corporate-speak for 'we haven't a clue what's going to happen next'.

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Second, the so-called "beer tie", where tenants must buy some or all of their beer from their landlord and on which Punch's business model is based - could be referred to the Competition Commission next week.

But the real bugbear remains the company's debt mountain. Despite slicing over £1bn off the top, through disposals and a rights issue, Punch still owes a net £3.5bn. And while the company "should be able to use £400m of cash and disposal proceeds to reduce debt further this year", says Lex, "concerns over trading mean the discount to asset value is unlikely to narrow soon".

Six months ago, we advised selling when the shares climbed above 150p (British pubs are struggling - here's a better bet on beer). They're now down a staggering 93% from the frothy days of mid-2007.

And with management finally making the right sort of moves, for those who like higher risk stocks, it's tempting to think about buying back in. But I'd wait this share price slide has happened even as the rest of the market has been roaring. When the Footsie falls back again, Punch shares will surely follow it down.

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