“Buy good shares when they’re cheap.”
That’s easy to say, but often not so easy to do. But can these two cheap pub shares really be good enough?
Back in the black
Shares in Punch Taverns (LSE: PUB) have had a hard time — they’re down 15% over the past 12 months, and down 65% since a peak in January 2014. But the latter part of 2016 is looking kinder for Punch investors, as the firm’s big restructuring and asset disposal looks to be paying off — and after a false start over April and May which quickly collapsed, the shares have put in a 30% recovery since late July.
The release of full-year figures today gave the price a 3.8% boost to 116.5p, as the company revealed that it is finally back in the black — against a pre-tax loss of £105m last year, Punch recorded a profit of £60m in the year ended in August. And that comes despite the new Pubs Code regulations apparently proving a bit of a pain and forcing the firm to revisit its pub lets.
The thing that will probably please investors most is the reduction in debt, which has been the driving force behind Punch’s recovery plan. Over the year, nominal net debt was cut by £233m — a drop of 16%. And the company’s property estate has been externally valued at £2,030m, which exceeds nominal net debt by £848m.
Forecasts now put Punch Taverns shares on a prospective P/E multiple of just five for the year to August 2017, with a return to EPS growth on the cards — City analysts have a 23% hike penciled in. A lot of that apparent undervaluation will be covered by the firm’s debt, but its property asset value suggests that’s not such a big problem now. And I think the shares look good value.
There’s no dividend on the cards yet, and I wouldn’t want there to be one — I want to see cash used to chip away at debt. But overall, I can see 2016 being a turnaround year.
Fellow struggler
Enterprise Inns (LSE: ETI) shares a lot of similarities with Punch Taverns.
For one thing, its shares are also on a very low P/E, of just five based on expectations for the year ended in September — results are due on 15 November. And Enterprise Inns is also working to reduce a sizeable debt pile. At its interim stage on 31 March, the company had net debt of £2.3bn on its books, although that was balanced by property of £3.7bn (based on a September 2015 valuation, not expected to be materially changed, and will be revalued by full-year results time).
August’s trading update revealed a 1.9% rise in like-for-like net income from its leased and tenanted business for the 44 weeks to 30 July, and the firm is increasing its number of managed houses — there should be more than 100 in operation at September’s year-end.
Earnings had been falling, but 2015 saw a halt to the slide and expectations for this year and next suggest a flattening off. And, again, there’s no dividend. But at this stage in the firm’s progress, with debt needing to be reduce further, and in the current economic climate, I’d be satisfied with that — and again I think we could be looking at a good long-term bet.
