The Investment Column: Luminar looks gloomy - but the cash flow makes it a hold

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The Independent Online

Stephen Thomas, the Welshman who turned Luminar into Britain's biggest bar and nightclub operator, is known as the "king of disco".

However, since its peak three years ago, when it had more than 300 venues, Luminar has been hit by the mushrooming of new bars on the high street. The resulting price war, combined with rising staff and regulatory costs, have eaten into pub and club operators' margins.

Faced with tougher competition, Luminar has tried to reinvent itself by turning its venues into big, branded, city-centre nightclubs, but the results so far are mixed. The Jumpin' Jaks clubs dragged down group sales over Christmas and the new year and will now be sold or rebranded, or if all else fails, shut down. Yesterday's trading update revealed an 8 per cent fall in like-for-like sales in the entertainment division, comprising the Jumpin' Jaks and Chicago Rock brands. The finance director Nick Beighton was brutally honest about the future of Jumpin' Jaks, saying: "They're all bad, but five are really bad."

Luminar, in particular the Jumpin' Jaks brand, has been hit by the new licensing regime. Many pubs stay open an extra hour on Thursday, Friday and Saturday nights, so punters do not need to move on to nightclubs after 11pm if they want to continue drinking.

Investors' patience is now starting to wear thin. Luminar has taken three years to restructure itself and admits it will take several more years to complete the process, by the end of which the size of the business will have halved. The group passed up a good chance to sell off the struggling entertainment division when it rejected an offer as too low last year.

On the bright side, Chicago Rock has performed better and the dancing division posted like-for-like sales growth of 2.3 per cent in the five weeks to 2 January. The four big nightclub brands are now the company's focus and it is no surprise given Oceana, Lava & Ignite, Liquid and Life notched up combined sales growth 6.8 per cent. Luminar has impressive cash flows. It boasts a cash flow yield of 7 per cent and this makes it a hold.

Plenty more growth to come as PlusNet weaves its web

Although PlusNet shares have more than doubled since this column tipped them a year ago investors should be in no rush to cash in. Business is booming at the broadband provider and yesterday's trading update from the group highlighted this. For the year just gone, PlusNet boasted that its customer base has nearly double to 176,000.

There is plenty more to play for in the UK broadband market. Of the 25 million households nationwide, 16 million are connected to the worldwide web and just over half of these have high-speed access via broadband. This figure will grow quickly in the coming years as the internet becomes ever more important for businesses and increasingly demanded by consumers who can now not only do their shopping and book holidays online, but also download films and music when they want.

PlusNet is well placed to cash in on this trend. Although it is one of the UK's smaller broadband provi-ders, it is one of the lowest cost and most efficient around. This is because PlusNet's business model makes full use of the internet - 90 per cent of its customers interact with the company solely via the web - meaning the group has to employ just 200 staff in total.

The other advantage of PlusNet's business model is that it can quickly and easily integrate acquisitions. Hence, its £1.7m purchase of the internet services provider Metronet in November is already bedded down. Further small acquisitions by PlusNet are likely.

However, it is inevitable that the group will eventually be taken over by a bigger player. But, even without a bid, PlusNet shares are cheap. At 14 times forecast earnings the stock trades at a 40 per cent discount to Pipex, its nearest peer.

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