Investment Column: This company looks Punch drunk, so sell
N Brown; Air Partner
Thursday 15 October 2009
Our view: Sell
Share price: 96.65p (-19.25)
You know it's time to start worrying about a company when its management resorts to bombastic statements about how their wonderful product is a cultural icon in good old Blighty. So here's Punch Taverns: "We believe the pub is still one of the most important cultural components of social life in Britain. At Punch, we are committed to safeguarding the future of the great British pub."
Presumably, this is designed to detract attention from what are basically rotten results. The punch drunk chain is reeling under a debt mountain of nearly £4bn, has written down the value of its estate by £663m, and tripled annual losses to £173m. If you strip out the non-cash items in the numbers, you find that the company is still making money, more or less. To be accurate, 39 per cent less, at £160m.
What's worse is that sales figures across a string of business lines show nasty negatives. Measures are being taken to address the problems – underperforming pubs are being put into a recovery unit, or sold, which is raising much-needed cash to pay down that debt.
But the outlook, the company said, is "challenging" and "lacks visibility". That's what other pub companies have been saying too, but their results have not looked as bad as this. Some of them have even shown signs of encouragement, particularly the smaller ones.
Punch only trades on 6.4 times 2010 full-year earnings, which is hardly expensive. But given the business's problems, it's hard to say that it deserves a better rating. Even if its turnaround measures start to bear fruit, the question is whether an enormous, impersonal chain can ever really effectively run an "important cultural component of social life in Britain". The Campaign for Real Ale appears to think not and nerves are jangling about its super complaint over tied beer prices that the Office of Fair Trading will soon rule on.
There have been suggestions that shareholders would be better off with a break-up. We agree. Time gentlemen, please. Sell.
Our view: Buy
Share price: 257.6p (+3.6p)
Caution has been the watchword for the online and catalogue clothing retailer N Brown over the last 12 months.
The company, which caters for what it describes as the "older and larger customer", has scaled back advertising and looked at ways of getting its debt pile down. Judging by yesterday's interim results, the strategy appears to have worked.
The group says first-half profits were up 13 per cent, while full-year targets are on track to be met. So far so good, and the investment case is that much stronger when the fact that the group trades at a huge discount to the rest of retail sector is considered (it is on 11.2 times 2010 forecast earnings).
Investec says the stock is a buy, arguing that the discount is unjustified: "We think the price-earnings discount to the sector – around 23 per cent for 2010 – is unwarranted for a company that can grow the top and bottom lines in both good and less good economic times."
Alan White, N Brown's chief executive, also argues the shares are too cheap (as company bosses are prone to), but concedes that the market factors worries about bad debts into the stock price. He also admits that while he is a little more confident than during the heat of the banking crisis, rising unemployment could weigh on a recovery.
Nonetheless, we rather like N Brown and back its planned move into the US market, where it hopes to operate from the end of next year, and where it says the "demographics fit our size profile". We also like the group's caution over the last 12 months and think the dividend yield of four per cent is enough to keep punters interested in the meantime. Buy.
Our view: Hold
Share price: 570p (-27.5p)
Air Partner, the private jet chartering group, has had a horrible recession – full-year profits crash landed, dropping by 90 per cent to just £0.9m the company said yesterday.
In August last year, chief executive David Savile maintained that he was pleased with progress and said that even with the looming financial crisis, he was confident the company would be able to increase its proportion of safer non-corporate clients. More than a year on, the proportion of public sector clients has not increased. Mr Savile now claims Air Partner is in a much better position than most of its competitors.
Maybe, but the stock has nosedived from 885p when we last looked. Moreover, even according to analysts at house broker Oriel, it is looking expensive, trading on a forward price-earnings ratio of 27 times.
That said, we would hold on to the shares. After maintaining the dividend – paying it largely out of strong cash reserves – Air Partner yields an impressive 5.7 per cent, which is well worth having until earnings and the shares turnaround. Hold.
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