Derek Pain: I'll be toasting this 'Spirited' performance

No Pain, No Gain

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The Independent Online

The Spirit Pub Co. has yet to prove its worth to the no pain, no gain portfolio, but I have a sneaking suspicion it will not be too long before I raise a celebratory glass. The shares have topped 60p since their arrival; they have also been as low as 35p.

The price, as I write, is 49p – capitalising the group at £323m – compared with the 42p the portfolio paid. Any gain is welcome in these bleak days that have seen a number of constituents in difficulties.

The pub chain's performance has not been great; perhaps, dare I say, spirited rather more accurately acknowledges its display. Still, I believe the foundations have been laid for a successful campaign and, so long as the stock market keeps its head above water, the shares will eventually reflect the endeavours of chief executive Mike Tyre and his team.

The third-quarter trading statement was sufficiently refreshing to whet my appetite, but the pub business remains under a stock-market cloud, with many observers apprehensive about the impact of recessionary influences.

Yet pubs are doing rather well on the food front with their competitively priced offerings. Consequently, the beerage and stand-alone, managed pub chains are performing more strongly than generally appreciated, although time is being called on some sections of the more drink-dominated leased and tenanted side of the industry.

Brewers, besides their production and wholesale operations, usually have chains of managed pubs that more than counter any woes from their tenanted and leased estates. The likes of Fuller, Smith & Turner (London Pride), Greene King (IPA), Marston's (Pedigree) and Shepherd Neame (Bishop's Finger) have not only displayed resilience but made progress. And "pure" managed pub chains, such as Mitchells & Butlers and JD Wetherspoon, have also produced sound returns, despite the recession and operating in an environment where successive Governments seem determined to tax bars and restaurants out of existence. A recent survey showed Britain's beer drinkers were the most heavily taxed in Europe.

The quoted tenanted and leased pub chains are Enterprise Inns and Punch Taverns. Both were created with debt-laden deals and are now struggling. Enterprise shares are 67p, pricing the group at £339m. Punch is a mere 7.75p, a £51m capitalisation. The shares of each once comfortably topped 1,000p.

Punch looks particularly forlorn because of the departure of Spirit. Last summer it was hived off, taking with it the group's managed estate and a collection of leased pubs. It could be said that Punch was left with many bottom-of-the-barrel outlets. If the two had not gone their separate ways, there is a chance that Punch shares would be approaching 60p.

Shorn of the Punch involvement, Spirit has joined the dividend list and, at the halfway stage, achieved a £19.4m profit. Since then it has, according to its third-quarter statement, continued to progress. True, its sales advance slowed, but its managed pubs are still making headway with a gain of 3.7 per cent. The advance for the year so far is running at 5 per cent.

The leased and tenanted estate is a less-happy experience. Income slippage increased in the third quarter and around 100 under-performing pubs have been earmarked for sale with 27 of them already dumped. Some outlets are being converted to management.

Spirit, embracing such brands as Chef & Brewer and Fayre & Square, paid an 0.65p a share interim dividend, and there are hopes it will round up the payment to 2p when it rolls out full-year figures. Certainly the final months of its year should benefit from the Queen's Jubilee, Euro 2012 and, possibly, London's Olympic Games.

Mr Tyre is confident enough to have splashed out on 109,000 shares, paying 45.75p a pop and lifting his stake to 406,000 shares. I usually find it encouraging when an executive puts his hand in his pocket to increase his presence on the share register. There is not universal support among the City's army of analysts, although one firm, Deutsche Bank, has removed its sell recommendation and now regards Spirit as a hold.

I maintain that the shares are still worth buying and I also wonder about the depressed shares of Punch. Surely at 8p there is some headroom. They could well be worth a gamble.

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