Derek Pain: Why Booker is still a star in my good books

No Pain, No Gain

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The Independent Online

I am wondering whether the no pain, no gain portfolio should end its relationship with its star performer, the Booker cash and carry chain. The shares have topped the 100p mark against the 24.5p, paid in January 2009. Should such a generous profit be left to, hopefully, run further ahead – or locked in? There is a strong chance the group will keep up its trading momentum. But the proposed acquisition of loss-making rival Makro will almost certainly, if it goes ahead, dampen the performance of the enlarged business over the next year or so.

The £140m takeover has still to be approved by the competition authorities. I cannot see any reason why the deal should be blocked but Whitehall mandarins could, in their infinite wisdom, decide the merged operation is too dominant. Still, if Booker is allowed to absorb Makro the eventual benefits could be significant. But the stock market is an impatient place and any short-term drag on the already highly rated shares could blunt investor enthusiasm.

Some time ago I decided to put a 55p sell order on the shares. In view of Booker's progress since my precautionary move such a price is now completely unrealistic. So I am lifting the dumping level to 90p. Of course, I hope the shares will at least hold their present value, even move higher. But it is better to be safe than sorry. Too often stock market darlings lose their appeal.

Booker has estimated that in the year ended December Makro sales will be down 9.1 per cent to around £715m and an operating loss will emerge near £18m. Integration will occur next year with merger benefits flowing in 2014.

Last week Booker produced another scintillating set of figures. Excluding Makro's performance, which cannot be added until the takeover gets the all-clear, half-year profits advanced 13.3 per cent to £51m. Sales rose 3.3 per cent to £1.9bn. With cash in the bank adding up to £69.8m (against a corresponding £57.7m), the interim dividend is up from 0.33p a share to 0.38p.

As I write the shares are near 102p, capitalising the company at around £1.75bn.

From the star performer to a portfolio constituent that has made a good impression since joining last year. The Spirit pub chain was recruited at 42p in August, just after it was split from the once pace-setting Punch Taverns. The shares are now around 59p, pricing the company at £388m.

Mind you, at first sight the group's results look appalling — a staggering loss of £589m. But that figure was struck after £640m of exceptional charges, mainly reflecting non-cash property revaluations. A more realistic outcome is a pre-tax profit of £51.1m, up 16 per cent. And the group is continuing its dividend-paying policy with a maiden final, making 1.95p for the year.

Spirit is, in a sense, a company of two halves. Its near 800 managed pubs, trading under such banners as Chef & Brewer and Fayre & Square and mostly offering food along with booze, represent the successful side, accounting for much of the group's profits. Management has concentrated on revamping the managed estate and its success is evident in the year's figures. The rest of the business is made up of approaching 500 leased and tenanted pubs. The managed houses produced a 4.8 per cent sales increase whereas the rest of the estate suffered a 4.9 per cent net income decline.

Much of this fall stems from rents being reduced, as trading conditions have changed dramatically since they were last fixed when the pub trade was riding high. For example, in the industry's halcyon days Punch shares were comfortably above 1,000p, getting near to 1,500p, I seem to recall. Before the split the shares were trading around 60p; now the price is a mere 6.75p as the indebted pub chain continues to hold talks with the banking community. At 6.75p Punch, with some 5,000 pubs, is valued at £44.5m, yet its debt pile is some £2bn. But one intriguing aspect is that a stake the pub chain holds in a drinks distributor could, some believe, be worth around 7p a share.

But back to Spirit. Profits this year could hit £56.6m and stockbroker Numis expects further dividend progress, and suggests a year's total of 2.17p a share.

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