Punch Taverns still pulling pints through the cost of living crisis in 2023

Performance in Q2’23 has remained robust, generating £15m of underlying EBITDA.

Revenue amounted to £66.1m, compared to £56.4m in Q2’22, mainly due to the conversion of pubs from Leased & Tenanted to a Managed Partnerships estate, which contributed to the increased revenue.

Operating performance Q2’23

All three divisions across Leased and Tenanted, Management Partnership, and Laine Brewery achieved like-for-like sales growth over the period compared to last year. Additionally, the Leased and Tenanted division achieved growth in like-for-like rental income.

The underlying EBITDA LTM, amounted to £82.5m. This represents a positive comparison to the £76m of Adjusted EBITDA from the broader Punch Group during the year up to August 2019, prior to Covid.

Furthermore, an additional investment of £5.2m  of mainly maintenance capex was made during Q2’23, and the establishment of a new “Laine brewery” to expand the beer production capacity.

Key to the strategy is the conversion of leased & tenanted to the managed estate. Having converted 71 pubs from Leased and Tenanted across to the Management Partnership division since August 2021, and 5 of which were converted in Q2’23.

As a result EBITDA contribution has been £2.3m, on the back of increased revenue of £12.7m in the managed estate. Dragging down the total underlying EBITDA are central head office costs of £13.4m. Food revenue has been a key part of the conversion strategy, yielding another £3.1m in revenue. Operating costs have increased mainly due to higher energy costs over the past year. This is expected to ease of H2’23 and into 2024. Wholesale energy costs have decreased significantly, back to pre-Ukraine invasion prices and near pre Covid levels at £88.9pp/MWh, down 50% on this time last year. However, with the economic outlook weak in the UK, with current high inflation over 10% and interest rates climbing, the cost of living will challenge the pubs to bring in business.

Cashflow

Adjusted LTM EBITDA of £81m less negligible working capital movements of £2m and CAPEX of £30m, generates £51m in unlevered free cashflow. Interest payments of £39m and lease payments of £10m reduce net free cashflow to £2m LTM.

CAPEX mainly consists of purchasing of freehold property and maintenance expenditures relating to pub fittings and fixtures.

The liquidity position is made-up  of £13m in cash and an RCF of £70m of which £35m is currently utilized. Total available liquidity of £48m.  

Leverage & Interest Coverage

Punch is highly leveraged at 8.69x, slightly up from Q1 at 8.49x. This was due to the increased utilization of the RCF of £5m to £35m.

EBITDA interest cover of 1.63x and FFO cover of the same is currently in line with management expectations of working capital and CAPEX requirements for 2023.

Outlook

The net value of properties in the portfolio in February 2023 was £903.4m, the latest valuation. The valuation undertaken at the High Yield Bond launch in May ‘21 was £849.7m. This illustrates the stability and sustainability of the business model. The increase in values largely reflecting the purchase of the leased and tenanted pub estate from “Youngs”

The Group benefits from operating a predominantly freehold estate, with 93% of the pub portfolio owned on a freehold or long leasehold >50 yrs. They have enough cashflow to keep CAPEX maintenance at the correct levels for the portfolio.

Interest coverage of 1.63x is sufficient and EBITDA margin of 20% is forecast from management. Leverage remains high and the cash position is low but the business manages to generate enough operating cash to cover working capital, CAPEX and interest payments.