Investment Column: Don't depose Greene King just yet

Carillion continues to build on its success; Keep Teather on hold in the hope of better times
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The Independent Online

With Euro 2004 drawing to a close, Greene King, the pubs operator and brewer, is hoping that its customers carry on drowning their football sorrows for the rest of the summer.

The company yesterday delivered strong results, thanks to the good weather last year. Greene King operates three businesses - brewing beer such as Greene King IPA and Old Speckled Hen, managing pubs in-house, and leasing out pubs to tenants who pay rent and buy beer from the company. All three divisions are performing well, with underlying profits for the year at the group up 10 per cent to £74m.

The beer market is in general decline in the UK, but Greene King is taking further market share. Some 78 per cent of its sales are to external customers. This means it is not reliant on volumes in its own pubs and sales through supermarkets are improving.

The managed pubs business, however, is having a difficult time from tough competition and high overheads. Like-for-like sales dropped to 2.7 per cent in the second half of the year from 3.8 per cent in the first half. But the majority of Greene King's pubs are leased and tenanted, and underperforming managed pubs can be converted. Some 5 per cent of the estate was switched last year, boosting operating profits per pub in its managed division by 10 per cent.

A parliamentary committee, however, is investigating the relationship between pub companies and their tenants to see if the arrangements are fair. Greene King may find it has to be more open about its agreements with tenants and there is some risk of reputational damage. The impact will be greater, however, on larger operators.

Greene King is a cash-generative business, which gives it options for share buy-backs and acquisitions. But at 985.5p, Greene King's shares have enjoyed a good run recently and are now trading at about 12 times earnings. This makes them fairly valued at present. The company is bound to be looking at Laurel Pubs, a rival estate up for sale, though, so hold on to your place at the bar.

Carillion continues to build on its success

Carillion is a construction company that has not given up on the mucky business of actually building stuff. Others, such as Laing, have turned themselves into managers of construction but Carillion argues that customers want to speak to the company that is actually going to do the building work.

Although Laing is doing well under its business model, the Carillion "integrated" approach appears more persuasive in a market that is still evolving to meet the needs of the Private Finance Initiative.

Carillion has got out of some construction activities, selling operating such as electrical engineering and social housing. But it retains a one-stop-shop capability to design, build, finance and manage a facility. The company will also undertake work not in the PFI mould, such as building supermarkets for Asda.

Carillion decided last year to sell off its equity stakes in PFI projects, once schemes are up and running. This allows the company to return the profit on the PFI equity invested to shareholders and allow it to recycle some of this cash in new PFIs.

Along with others active in the rail business, the company has lost rail maintenance work from Network Rail but it continues with rail renewal work. Leaving rail work aside, the company is growing profits at a healthy rate - group profits should be up 8 per cent this year.

A trading update issued yesterday said results for the half-year, to the end of June, would meet City expectations. We are awaiting news on some £2bn worth of PFI bids that are in the pipeline.

At 192p, the shares trade on an undemanding forward multiple of 11, making this a buy.

Keep Teather on hold in the hope of better times

Teather & Greenwood has come a long way since the dark days of the bear market, when the broker for small and medium-sized companies was hit hard by plunging stock markets and an absence of desire by its clients to do deals.

The business had to launch a rights issue to raise cash, and slashed its headcount by about 100 in 2003, as it fell to a £7m loss.

The outlook has been far sunnier in the past 12 months. Teather returned to the black yesterday - notching up pre-tax profits of £1.3m in the year to 30 April - on a 36 per cent rise in turnover to £18m.

Saying it would not pay a dividend, Teather now plans to invest in expanding in most areas of the business, including corporate broking, market-making and equities research.

Teather is in a strong position to fulfil its goal of doubling turnover within the new few years. It is led by an experienced team - Ken Ford, formerly of Morgan Grenfell, is chief executive and Lord Baker of Dorking - the a former Tory education minister Kenneth Baker - has become chairman.

As its fortunes are heavily affected by the health of the stock market, Teather's shares unsurprisingly track the wider market. They have fallen from over 50p earlier this year, closing at 37.25p yesterday. While the outlook is not without uncertainty, Teather is a sound bet for catching the possible upside. Hold.