Punch scraps its dividend but claims fall in sales is slowing
Thursday 04 September 2008
Punch Taverns scrapped its final dividend yesterday "to conserve cash" in the face of ongoing economic uncertainty, putting stocks across the sector on the skids.
Pubs are having a torrid time. The combined impact of rising barley and wheat prices, the smoking ban, tax hikes, and bargain booze in supermarkets – alongside credit crunch-related consumer spending concerns – is keeping punters at home with their on-demand multi-channel TV rather than sinking a jar at their local.
But Punch says its falling sales are flattening out, and that the scheme to scrap the dividend is an insurance policy in the face of unpredictable financial markets. Of the group's massive £4.7bn of debt, some £4.4bn is secure in a long-term mortgage. But the remaining £295m is in convertible bonds and must be paid off by the end of 2010.
"Trading overall hasn't deteriorated since the last time we reported in July but we don't think it is efficient to change our plan at this stage," Giles Thorley, the chief executive of Punch Taverns, said. "It means the company will be able to repay the bank from its own resources without relying on the financial markets, allowing us to conserve cash and continue to invest in the business."
Like-for-like sales were down by 3.4 per cent in the leased estate and by 3.3 per cent across the group's managed outlets, according to yesterday's full-year trading update. But the pace is slowing as customers get used to the smoking ban, and more people are tempted in to eat.
"In our managed business the rate of decline is slowing considerably," Mr Thorley said. "We were down 3 per cent when we reported in July, but the rate pulled back to a 1.8 per cent fall since then."
The reaction in the City yesterday was mixed. Investors baulked at the news and Punch lost 12.15 per cent, falling to 278.25p, and sending jitters across the sector. JD Wetherspoon lost nearly 4 per cent, Mitchells & Butler more than 5 per cent, and Enterprise Inns nearly 9 per cent.
Matthew Gerard, an analyst at Investec, said: "Considering that the UK consumer decline has accelerated and could potentially be longer and more severe than we initially anticipated, and that wet-led leased pubs are particularly exposed, we move our recommendation from Buy to Hold and place our price target under review."
But not everyone is pessimistic. James Ainley, an analyst at JP Morgan, said: "This removes the need for an equity issue and, although causing a negative short-term reaction, should be seen as good news."
The problems caused by the economic climate are aggravated by a longer term decline in beer-drinking. Beer sales in pubs are at their lowest since the Great Depression, and some seven million daily pints lower than the market high in 1979, according to the British Beer and Pub Association. There are all kinds of reasons – fewer factory workers stop in at their local, an ageing population, the growing popularity of wine – but the last year has seen the trend accelerate precipitously. On-trade beer sales dropped by 8.7 per cent overall in the year to May, and by 9.6 per cent in the first half.
Punch also confirmed yesterday that it has been cleared to put in place a Real Estate Investment Trust (Reit) structure, which avoids corporation tax in return for the distribution of 90 per cent of income. But because of the costs of moving to the new regime, the implementation will wait, the company said.
Punch's full-year results will be published in November.
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