Derek Pain: Little cheer ahead for pubs, but I'm not giving up drink
No Pain, No Gain
Saturday 24 March 2012
Budgets come and go but the tax burdens inflicted on the poor old pub remain hideously severe. And with the squeeze on consumer spending and cheap supermarket booze it is not surprising many regard the traditional local as an endangered species.
Yet since its creation, the no pain, no gain portfolio has reaped rich rewards from investing in pubs and the wider drinks industry. Constituent Burtonwood, a pubs chain, was taken over at a handsome profit and Scottish & Newcastle, the last of the so-called "big six" that once dominated breweries and pubs, fell to a Continental strike allowing the portfolio to more than double its investment. Last year's departure, the Capital Pub Co., following a bid from brewer Greene King, provided further drinking money. In addition, spirits group Allied Domecq and cider maker Merrydown surrendered to generous offers. Other hits include Six Continents, a restaurant takeover (La Tasca), as well as pub and restaurant chains Paramount and Prezzo, sold at attractive prices.
The drinks industry was once the City hotspot for corporate action as Britain's beerage consolidated. Hysteria eased once most available targets were absorbed, but then Lord Young's disastrous Beer Orders revived the bid ferment, although this time round the big brewers and upstart pub companies were the victims. A story used to circulate about a Manchester stockbroker who, in the 1950s or 1960s, purchased shares in every available brewery. He made millions of pounds from the frantic bid activity.
I suppose the portfolio arrived at the tail end of the bid excitement. Still, its early successes encouraged me not to neglect the booze business and, as I write, the portfolio's three direct participants as well as constituent Booker, with more than a passing interest in selling various drinks, have, despite the bar room gloom, performed well. Shares of cash and carry chain Booker are the star performer with ex-brewer Whitbread (budget hotels, Costa Coffee and pub/restaurants) in third spot. Spirit, a pub/restaurant group, has also done quite well, and Marston's is just in the money.
The desire to eat out has come to the rescue of many beleaguered pubs. It is the drink-led pubs that are under intense pressure and there are fears their days are numbered. My three groups have each embraced the eating out phenomenon. Marston's, a traditional brewer and pub owner, rolls out such beers as Pedigree and Brakspear and has around 2,150 outlets. It has spent heavily building around 50 pub/restaurants and plans a further 25 this year. Average cost of each establishment is £2.5m. In a trading update covering 23 weeks, the group said managed pub sales climbed 3.5 per cent and tenanted estate profits 3 per cent. Chief executive Ralph Findlay warned of spending pressures, but stockbroker Peel Hunt was sufficiently encouraged to lift its share rating to buy.
Spirit, split from Punch Taverns last summer, was also quite cheerful with a second-quarter report. The Chef & Brewer and Fayre & Square pub/restaurant chains said managed pub sales were up by 4.6 per cent and the leased estate was not doing too badly.
Whitbread recently produced trading news. I thought the reported performance reasonable, but I notice a number of City analysts have taken a more bearish view, although stockbroker Shore Capital says buy.
There is no doubt pubs and restaurants face difficult times. But for the past few years the outlook has not looked too cheerful and the industry has still managed acceptable returns. The probability is modest headway will continue. I would not like readers to think the portfolio is addicted to booze in this absurdly anti-drink age, but the industry has served it well and I can see no reason to change its alcohol-related stance.
Now to the security industry. Portfolio member G4S, the world's biggest exponent of this increasingly sophisticated art, produced disappointing profits. At the pre-tax level they fell 17 per cent to £279m – slightly more than the £50m already pencilled in for the failed bid for rival ISS. Still, the year's dividend was raised by 8 per cent to 8.53p a share. Turnover increased by 4.7 per cent and further growth is expected this year, which takes in the Olympics where G4S is the security provider, but costs are advancing rather quickly.
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