Wednesday 20 April 2016 1:15 pm

Punch Taverns share price up seven per cent as company's investment strategy pays off, despite falls in profits

The share price of Punch Taverns, the UK's second largest pub company, has soared after the announcement of half-year results that show the company's turnaround plan is bearing fruit, despite a blow to profits. 

The figures

Punch's share price jumped seven per cent higher to 104p shortly after the company's half-year results to 5 March were announced this morning. 

That's despite the company's profit before tax, on an underlying basis, falling to £27.3m from £30.4m in 2015.

However, including non-underlying items, profit before tax actually fell 84 per cent to £54.7m from £348.5m in 2015. Profits were pushed lower by £288m of pub disposals it has undertaken in the past 18 months and the previous year's figures had been distorted by one-off gains associated with its debt overhaul.

Revenues also edged down to £212.9m, from £221.7m the previous year. 

Average profit per pub across Punch's estate was up three per cent. The company, which owns around 3,300 pubs across the UK, is in the process of offering its publicans new retail contracts (which are essentially franchises) and said today it already has 50 retail pubs open.

Its commercial free-of-tie lease division currently has 41 pubs in operation with an average rent of £72,000.

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Why it's interesting

Although the half-year results might seem underwhelming, the figures reflect a positive change in strategy for the pubs giant, which has cut its net debts by £288m to £1.2bn, eighteen months after it launched a £600m debt-for-equity restructuring. 

The new retail contract has been a success, with 50 retail (essentially franchise) pubs already opened, and a further 121 candidates identified. Punch also now has 41 pubs operating on commercial free-of-tie leases and is converting a number of sites to its new Champs sports bar and Brew & Baker coffee shop brands.

The company more than halved its yearly losses to £105m in the year to November 2015.

What Punch Taverns said

Punch chief executive Duncan Garrood said:

We are already making good progress delivering on the strategy we set out in November 2015. We have launched new operating models, renewed our focus on customer service and delivered improved support to our publicans. The roll-out of our new retail contract is progressing well with underlying profit and sales post conversion being ahead of our initial expectations. The combination of our growing cash balances, strong cash flow and limited scheduled amortisation over the next five years puts the group in a stronger financial position going forward.

What others said

"Punch is clearly succeeding in its strategy to date, and the question now is what it will be able to do with cash on its balance sheet, currently £235m, boosted by the £46m sale of the JV share of Matthew Clark. Add to that the fact that tenanted pubs are less volatile in performance than managed ones, and that Punch is wholly UK-centric, and the attractions appear stronger," Paul Hickman, analyst at Edison Investment Research, said.

"Investing in the pub industry is a long game, and Punch is still in part dealing with the overhang of the financial crisis eight years ago."

In short

The pub giant's strategy has seen it punch above its weight, with its retail contract strategy paying off and large drops in profits unlikely to plague the company in the coming quarters as its restructuring stabilises.