The Investment Column: Pubs sector: Time to buy a round

Hold BTG for a potential tonic from its lawsuits; Efes targets London investors in float plan;
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The Independent Online

The pubs sector has emerged as one of the most important on the stock market, and within it are some of the most potentially lucrative, low-risk shares. Investors should get a round in.

The pubs sector has emerged as one of the most important on the stock market, and within it are some of the most potentially lucrative, low-risk shares. Investors should get a round in.

Punch Taverns and Enterprise Inns have created vast pub estates from which they harvest a nice rent from the tenant-landlord. Mitchells & Butlers, recently carved out of the old Bass brewing empire, manages its own pubs. Under this model, the central costs are higher and the pub wages and overheads fall to the group, but the venues tend to be larger and so generate more profit. Regional brewers such as Wolverhampton & Dudley and Greene King also have significant pub estates still, and Whitbread is a major player in food-focused pubs through its Beefeater chain.

A doorstopper of an investment note from Deutsche Bank, which has some of the most highly respected leisure sector analysts, was published yesterday to help investors navigate the sector. It concludes that, after the Nineties were a decade where the industry conspired to lose money, pub company managements are now much more savvy in driving sales, keeping costs lower and reaping the advantages of having made pubs more food, family and female friendly. On the biggest current perceived threat to the sector, Deutsche argues that a smoking ban could attract more people to the pub than it drives away, since most venues have outside areas for smokers.

The strong cash flows generated by pub companies from here ought to reward shareholders through rising dividends. Of those stocks with decent dividend yields already, Mitchells & Butlers, with 3.5 per cent, and Greene King, with 3.8 per cent, are Deutsche's picks. The tenanted pub companies, Enterprise Inns and Punch Taverns, are most insulated from any consumer slowdown and their pre-eminent cash generation puts them among Deutsche's picks, too.

Only JD Wetherspoon is singled out as a "sell". It is facing copycat competition on the high street and been forced to abandon its expansion plans.

Hold BTG for a potential tonic from its lawsuits

BTG, formed out of the old National Enterprise Board and privatised in 1995, invests in new technologies, adds its commercial nous to the projects, and then licenses them out again to corporate partners in return for one-off fees and royalties.

The company has its biggest expertise in medical fields (it is still licensing improvements to the MRI scanners it pioneered in the Seventies) but has also suffered its biggest disaster in this area. The company raised £120m in 2000 to fund a surgery-free varicose veins treatment it had picked up from a Spanish doctor who had used it on hundreds of patients. But US regulators requested so much more safety data than expected that the commercial launch has been kicked out to 2010.

In recent years we have had as over-optimistic a view of BTG's prospects as its management, and we have been tipping the shares, albeit with risk warnings, all the way down.

It always has been a long-term investment, and there is no point bailing out now. At 104p, the stock trades in line with even bearish brokers' sum-of-the-parts valuations, with nothing in for Varisolve. There is potential upside from the company's various patent battles with Apple, Amazon and Microsoft, which might end with lucrative settlements. And, next year, Varisolve will be sold or abandoned. The stock could perk up.

Efes targets London investors in float plan

Efes Brewing International is an intriguing cocktail of a company. The international arm of a Turkish beer monopoly, EBI is headquartered in the Netherlands and, if all goes according to plan, will have a stock market listing in London later this month.

Any Turkeyophile would know the group best for the Efes lager that gave it its name - and was named after the most important Asian city of old. But the group has no interests in Turkey, since it was set up by its parent company six years ago to sell that brand and others in the more exciting markets emerging elsewhere.

So EBI's biggest market is Russia, where it makes nearly three-quarters of its sales. It has nine breweries across Kazakhstan, Moldova, Romania and Serbia and Montenegro.

In its favour is its focus on premium lager in growing markets, which sets it apart from more mature Western brewers. Working against EBI, is the international brewers' scramble for market share in Russia: Carlsberg was launched there last year and Scottish & Newcastle plans to start selling Fosters and Kronenbourg there this year. And although Russia's beer market is forecast to grow fast - at an annual rate of 8 per cent - that's about half the rate of a few years ago.

EBI is raising money for expansion and yesterday set a price range of $20.75 to $23.75 for its London stock, valuing it at $614m to $703m. Its parent, Anadolu Efes, is not selling any of its shareholding, which will fall to 70 per cent, although some institutional backers, which include one of George Soros's funds, are.

Retail investors can't subscribe to the placing, but it's worth placing an order when the shares start trading.

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