The Private Investor: 'Time to invest, now the froth has blown off the beer trade'

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The Independent Online

Slogging up a long, one-in-four incline last weekend, deep in Derbyshire's peak district, only thoughts of the pub ahead kept my out-of-condition walker's legs moving. Not just prospects of the Lathkil Dale hostelry's cool beers, excellent though they are, pulled me on. Prospects in the trade itself were good distractions to keep my mind off my aches. There's plenty in the sector for investors as well as drinkers.

It's because people there, including new neighbours such as Madonna, like pubs enough to spend £19bn a year drinking beer and eating in them, but not at huge profit. The industry has been a battleground for rationalisation and the dust is clearing.

Among those that have survived without becoming drinking factories, Greene King, which has just produced excellent results, epitomises the "buy" story. It has it all: three divisions in managed and tenanted pubs, plus a brewery, and solid, organic growth supported by periodic acquisitions. The broker Williams de Broe rates it a buy at 795p and a prospective price-earnings ratio to April 2004 of 10.4.

On top of excellent figures, there is extra colour from the sector's one-man venture capitalist, Michael Cannon. Inventor of pub brands Rat & Parrot, Hungry Horse and the Pickled Newt, he seems to be Greene King's regular supplier of acquisitions. The former publican turned multi-millionaire reportedly made £26m selling Devenish to Greene King in 1993, then £70m for his Magic Pub Company in 1996, finally making a treble with Morrells last year. Mr Cannon has just taken a 7 per cent stake in Eldridge Pope. He paid 145p a share in a move that took the market by surprise. No one had spotted the value. The 175-strong Dorset-based chain has no brewery, and had reported a 10 per cent fall in first-half, like-for-like sales. It is finding the High Street competition for the young market too tough, but its country pubs do better.

No one can believe that Greene King, or anyone else, will take Eldridge Pope off Mr Cannon at a profit, especially as it rejected Wolverhampton & Dudley's approach. But, as outsiders are saying, Mr Cannon may know something. Anyway, he has long pockets.

Elsewhere, good yields are on offer. Wolverhampton & Dudley, pick of the broker Teather & Greenwood, should raise its dividend from 29.1p to 32p a share this year, giving a 4.6 per cent yield at 700p. Earnings per share should go from 62.6p to 68.9p, giving an undemanding 10 times forward rating.

Having seen off a hostile bid at 513p a share from Pubmaster two years ago, Wolves has put its estate in better order. After taking over Marston Thompson and Evershed and Mansfield Brewery in the late 1990s it has 1,630 pubs, 488 managed and 1,142 tenanted. It has slimmed down its leading ale brands and cut its brewery operation to two plants, and is concentrated around the Midlands. Enterprise Inns and Punch Taverns are both factories now, but have strong stories. Punch makes money from beer sales and rents from its quality 4,500-strong estate of predominantly freehold pubs. Enterprise is expected to take out the 4,100-outlet Unique estate in early 2004 with the help of vulture venture capitalists. This will bring it to more than 7,000 outlets.

But shares of both have risen sharply in the past couple of months, to 270p for Punch and 844p for Enterprise. Teather forecasts earnings for 2003 are 29.8p for Punch and 67.6p for Enterprise. While both are liked, there is less value than there was, and they are consolidating near recent highs.

At the other end of the market, but by no means the smallest, is the Ofex-quoted Brakspear & Sons. This also has a takeover taste as JT Davies, another pub group, has built up a 29.9 per cent stake. It has sold its brewery for £10m to a developer, and its beer is being made and marketed by Refresh. Brakspear is concentrating on its 96-strong high quality tenanted estate, and trading profit last year showed an underlying 7.3 per cent improvement at around £4.5m.

Teather puts Brakspear's true net asset value at nearer 650p than the presently stated 381p. The 480p share price shows the market is unsure of the implied break-up prospects.

Such a fate has made other small regional pubs groups less shy. The rush to the High Street by the bigger groups has left them with the countryside and wealthier, older, customers. Resulting better profits have attracted attention. Nottingham's Hardys and Hansons shrewdly held its first analysts' meeting a couple of weeks ago after announcing a 15 per cent profit rise to £5.6m. After all, there is no point in keeping your light under a bushel if a low share price lures an unwelcome predator.

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