Derek Pain: Problems pile up for shell-shocked pubs

No Pain, No Gain

Four weeks ago I warned that shareholders in Pubs'n'Bars would suffer a sobering time when their results appeared. Unfortunately, the figures are even more distressing than I expected.

Almost every pub company has had a tough time. The recession, the smoking ban, miserable summer weather, continuous increases in excise duty, and supermarket competition have inflicted a bitter toll. For the heavily borrowed contingent, such as Enterprise Inns, Punch Taverns and little Pubs'n'Bars, the devastation has been unimaginably harsh.

Punch sought solace through a cash call and it looks as though Pubs'n'Bars, a constituent of the no pain, no gain portfolio, needs to resort to the same tactic. Let's hope it gives all shareholders the opportunity to decide whether to invest through a rights issue, rather than making new shares available to a privileged few by opting for a share placing.

Certainly the company is in an uncomfortable position with its auditors talking about the "existence of a material uncertainty, which may cast significant doubt about the group's ability to continue as a going concern".

I have moaned about the new accounting rules on many occasions. It is a travesty how they make life more difficult, particularly for small, overstretched companies. Pubs'n'Bars is yet another victim of these heavy-handed, ill-conceived and unjustified impositions.

First, it should be acknowledged that the group traded poorly last year, and it made little progress in the second half. But the near £9m loss (against a restated £342,000 profit) is, in real money, an illusion. Indeed, it could be argued that there was actually an underlying profit of nearly £1.1m against £1.8m last time.

A series of special charges and property write-downs have provoked a breaching of banking agreements. Consequently, relatively long-term loans have been reclassified as repayable within one year. Talks to restructure the loans – some £34.3m – are underway and, if they are successful, it is probable that the interest bill will be inflated. In 2008, the group endured a 43 per cent interest increase to £2.5m.

Last week, I mentioned that Private & Commercial, the hire purchase group, faced higher bank charges. Clearly, in these days of low interest rates, some banks are not only reshaping their balance sheets (with the help of taxpayers) but improving their income by increasing charges whenever they can.

Non-trading costs that hit Pubs'n'Bars, which has around 100 outlets, included a £5.3m freehold property write-down and a £1.6m lease impairment and amortisation charge. Accountancy costs, partly reflecting assistance over the new rules, rose from £54,000 to £122,000. Not surprisingly, no dividend is being paid.

The shares now bump along at around 4p. The portfolio paid 23.5p last year, while an earlier price brushed 50p. I realised the pubs game had encountered problems, but thought they had been accommodated when the shares more than halved. How wrong can you be?

I should have sold earlier, but now feel it is too late to do so. Still, Julian Tolley, analyst at stockbroker Hoodless Brennan, advocates a sale.

More encouraging tidings from two other constituents. Mears, the support services group, continues to expand its order book. It has won further contracts worth £70m, and has options on deals valued at £20m. So far this year, the social housing and domiciliary care group has been awarded contracts worth £175m. More are in the pipeline.

Chairman Bob Holt is remarkably cheerful. He says the "level of opportunities has never been stronger" and looks forward to organic and acquisition growth. The group is not experiencing – and does not expect – any slowdown in public spending in its trading areas, he adds.

Hargreaves Services, with interests ranging from coal mining to transport and waste disposal, is the other constituent in fine form. Chief executive Gordon Banham believes the group is on target to hit profit estimates – the stock market expects around £28.5m – and is looking to accelerate growth, particularly on the coal front. Hargreaves takes in the Maltby Colliery in Yorkshire and has expressed interest in open cast sites.

The group has also said it is pondering a move from AIM to full listing. This month another constituent, the Booker cash and carry group, completed such a journey. If Hargreaves does make the transition, it will mean that a third of the portfolio's membership is fully listed.

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