Strong Punch performance as pubcos adapt to survive

Punch Taverns has released its performance figures for the 12 weeks to 28 May, which indicate that the core unit is now in growth. Meanwhile, other pub whole business securitisation sponsors are looking to branch out in a bid to turn their own performance around.

Punch announced the demerger of Spirit Group earlier in the year (SCI 6 April) and the 12-week period - Punch's third quarter - has seen Spirit performing well. The managed business of Spirit saw like-for-like sales rise to +7.3%, while like-for-like net income for the tenanted estate improved from -6.3% in the first half to -0.7% in Q3.

"The Spirit managed estate continues to see pretty strong growth which is above peers, but it is worth noting there that it is recovering from a low base so it is being able to get the easy wins first. Interestingly, their uninvested growth is pretty good at 4%, which bodes well for the future," says James Martin, MBS analyst at Barclays Capital.

The upgrade and refurbishment programme for the Spirit managed estate is expected to be completed by the end of next year, so further growth is likely from ongoing investment. Converting leased estates should also improve performance.

Martin notes: "They are also talking about converting these leased estates back to managed and selling the remainder, so the performance should only really improve as they invest in that portfolio and improve the operational performance through conversion."

The outlook for Spirit is bright, but Punch also performed well. Most significantly, the core performance in what will be the new Punch group is no longer declining and is now in growth, although the non-core 'turnaround' group is still seeing large declines.

The new Punch group has disposed of more than 100 pubs since the half year, with only seven of those coming from the core division. ABS analysts at RBS report that this has seen the average net income per pub metric reach +1.3% for the 40 weeks to the end of Q3 and should put paid to suggestions of asset stripping.

One important factor in the strong quarterly performance has been the good weather in the UK, particularly in April. The bank holidays - including the additional holiday for the Royal wedding - played a part.

The demerger of Spirit is still scheduled to complete by September and Martin believes it should be achieved. He comments: "They are saying they are on track for the end of summer. It would make sense to complete at the end of August on the same date as the financial year end."

Punch's rivals, meanwhile, are also looking to change the way their leased pubs operate. Although franchising is typically an expansion tactic for fast-growing businesses, for the struggling pubcos there is a different motivation.

Both Marston's and Greene King have been investigating franchising, with Marston's retail agreement being awarded British Franchise Association accreditation earlier this month. Marston's has begun this trend in what Martin believes could be seen as a case of innovation in response to poor pub performance.

"Franchises are typically applied to businesses which are growing or needing capital. The pubs involved were at the bottom end of Marston's portfolio and, as a result, they are turning to this model as a last resort prior to disposing of these pubs," says Martin.

He continues: "But it is potentially quite a risky move because it is costing them £40,000 per pub to do it on pubs with low weekly turnovers. Maintaining efficient levels of brewery production may be another motivation for investing in these pubs rather than selling."

Despite the risks, it is a move that Greene King appears to be copying. While Enterprise Inns is not thought to be looking at franchising, Martin notes that it will likely adopt a managed tenancy approach. Finally, Punch "has said it will do percentage turnover rents, which seems to be pretty much the same".

JL