Punch Taverns has lost around 1.5% following an analyst site visit to the company's managed pubs estate on Wednesday.
Its shares are down 1.2p to 80.2p as broker Seymour Pierce issued a sell note on the debt-laden business. Analyst Hugh-Guy Lorriman said the company's management were impressive on the visit but the company seemed to be heavily dependent on refurbishing its pubs to boost earnings. He said:
Divisional managing director Mike Tye with his team, Steve Stone, Commercial Finance Director and Rob Godwin-Bratt, Director of (managed) property, presented with passion and conviction and impressed. The main learnings from the visit were on the refurbishment program. We learnt that an average Chef and Brewer refurb costs around £140,000, represents around £33 per square foot (versus around £90 per square foot prior to the new program) and takes around two weeks to complete (versus four weeks previously). The return on investment is 25% (hurdle rate) based on boosting sales by some 12% plus (i.e. operational gearing of two times). This is driven mainly by volume increase and the refurb tends to involve a capacity increase of around18% in terms of covers.
The issue with a refurb-based profit improvement plan is that it is cash hungry. In the case of Punch this looks risky due to the high demands of debt obligation which is one of our key concerns for the group. We remain negative on Punch bearing in mind the debt profile of the business.
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