Derek Pain: The sun shines on pubs and Spirit rises after breaking free
No Pain, No Gain
Friday 09 August 2013
The belated arrival of summer has offered some salvation to Britain's beleaguered brewing and pub industry. The shares have now thrown off the shackles and, along with the rest of the stock market, are enjoying the more relaxed atmosphere.
Last week I focused on Marston's, the brewer and pub owner that has been a constituent of the "no pain, no gain" portfolio for four years. Today it's the turn of Spirit Pub Co, a member for just two years.
The shares were recruited at 42p. They are, as I write, near their 78p peak, capitalising the company at more than £500m. Since the weather improved, the price has frothed up from around 60p. I suppose the general stock market buoyancy has made a contribution, but the prospect of many thirsty customers crowding into pubs and their gardens has clearly been a significant factor.
It also helped that the company arranged for City researchers to visit some of its pubs and offered some details of its ambitions. One who attended what has inevitably been described as an "analysts' pub crawl" was the experienced Douglas Jack of Numis Securities.
Mr Jack was obviously impressed. Last month he put an 85p price target on the shares and suggested the next set of pre-tax profits would emerge at £55.1m, then achieve £59m and in the following year hit £64.4m. The profits progress would, he suggested, be accompanied by improving dividend payments.
Spirit was split from the struggling Punch Taverns. The idea was to float the better pubs in the Punch estate as a separate entity, so obtaining far greater relevance for them than if they remained submerged deep in the debt hotchpotch of what was a rapidly assembled and latterly none too successful chain.
Punch is still attempting to do a deal with the groups that own its huge debts. It remains the largest chain in the land with around 5,000 mainly leased and tenanted pubs. The shares have missed the sunshine revival, limping along at around 13p.
Spirit, by contrast, has not looked back. The managed pubs have been, says Mr Jack, "transformed" since the demerger. And there are ambitious expansion plans. For example, the Fayre & Square pub/restaurants chain could be increased from the present 156 sites to 250, he adds.
Mr Jack points out that managed like-for-like sales have climbed 11.9 per cent since 2010. There is "still plenty of upside", he opines.
Accommodation is, perhaps, a weakness, possibly stemming from the Punch involvement. Spirit has 29 in-house hotels under its own Good Night Inns brand. Yet a further 97 hotel operations are run by other companies, including Premier Inn, the successful Whitbread chain.
The connection between Spirit and Whitbread (another portfolio constituent) is not confined to hotels. Whitbread's Costa Coffee is sold in Spirit outlets, with sales around £800,000 a year.
If the good weather continues, pub chains, including Spirit and Marston's, as well as Whitbread, will benefit. After last year's dismal summer, and the poor weather earlier this year, the nation's surviving pubs could be in for a rousing time.
Another constituent, Brightside, the insurer where a possible bidder lurks, has issued a downbeat trading statement that could influence the amount ultimately put on the table. The likely predator, the Gibraltar-based Markerstudy, may feel the signalled bid of 27p is top whack, so dashing hopes it could be persuaded to pay more. Markerstudy, with 9.3 per cent of Brightside, has to put up or shut up by Tuesday under the City's takeover rules. It could, of course, beg for extra time – a procedure often adopted.
In the trading update, Brightside said policy sales were up 14 per cent in the first six months. Yet although current trading is in line with expectations, it anticipates that underwriting capacity will restrict the growth of online sales, which is likely to "impact on the overall financial performance of the group in the full year". After those rather restrained comments, the shares fell and are below that 27p mark.
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