Another set of results and another impairment charge from the heavily indebted Toxic Pub Company.
Having written down its estate by almost £600m in the past year and a half, Punch Taverns has lopped a further £638m off the value of its managed and tenanted pubs on Wednesday.
The estate is now worth a total of £5.4bn, which equates to a net asset value per share of 260p.
From this morning’s annual results statement:
During the 52 weeks to 22 August 2009 the Group recognised impairment losses of £483.4m (August 2008: £154.8m) in the leased estate and £179.7m (August 2008: £139.9m) in the managed estate.
The impairment recognised within the leased estate was primarily due to the identification of further pubs within the estate considered unlikely to generate long-term sustainable growth following the change in the consumer environment impacting the long-term trading expectations for these pubs.
These pubs are likely to be sold or converted for alternative use within the next few years and have been written down to their fair value less costs to sell, being management’s best estimate of market value following consideration of past experience and the current market environment. A further impairment has been recognised for pubs where their expected future cash flows have fallen to a level such that their value-in-use is below carrying value.
The impairment recognised within the managed estate was primarily due to the reduction in profits experienced in the current financial period, being brought about by the change in the consumer environment impacting the trading for these pubs. The reduction in profits has subsequently impacted the value-in-use calculation. The impairment has been recognised on pubs where their expected future cash flows have fallen to a level such that their value-in-use is below carrying value.
Now, a couple of questions spring to mind. Who is going to buy these pubs? And with management describing current trading as ‘challenging’, does that mean further write-downs will follow next year?
Not according to house broker Merrill Lynch, which has repeated its buy rating on Punch this morning:
£663m FY impairment aggressive but increases comfort.
Punch has written down its estate by c10% this year. Whilst this may seem a little aggressive (we were forecasting 5%), it gives us more comfort that balance sheet values now reflect market values. The assets sold in 2009 were sold at close to book value (excluding goodwill adjustment). We think assets have been written down to make sure future disposals will be at least in line with book value.
In simple terms the new PPE value of £5.124bn less net debt of £3.465bn divided by 642m shares leads to the 260p NAV. Inclusion of all other balance sheet items, leads to the same value of 260p. Punch could still add to this NAV in the year by selling assets and buying back debt at a discount as well as using cash on the balance sheet. The new prudent NAV leaves >100% upside to the current share price of 116p (i.e. shares trade at a 55% discount to NAV).
Yes, Merrill really does believe the new NAV of 260p is “prudent”, even though 19% of the Punch estate is now in intensive care.
Back today’s statement.
During the year we successfully disposed of over a third of the original sites transferred to the Turnaround Division. As part of the continuous review of estate quality, a further 430 pubs have been identified and transferred to the Turnaround Division since the year end. The Turnaround Division now makes up c.19% of the total estate but contributes less than 6% of the operating profit and includes approximately two thirds of the total number of closed pubs and those pubs operating on TAW agreements.
Anyway, the market is less sure about Punch’s NAV as this morning’s price action demonstrates.
Shares in Punch are currently down 10.4p at 105.5p.
Related links:
Let the liquidation begin! – Long Room
Punch told to call time on business – FT