The Investment Column: Pubs wait to see effect of change to licensing laws

Click to follow
The Independent Online

At least seven pubs groups will publish trading updates for the key Christmas period over the next few weeks. As for many other retailers, which saw a rush in last-minute Christmas shopping, it looks like December split into a relatively quiet first half and a frenzied second half for pubs operators.

The big unknown is how much the recent extension of pub opening hours boosted Christmas trading. Many pubs now stay open an extra hour on Thursday, Friday and Saturday nights while many pub restaurants open an hour earlier on Sundays. The new licence regime came into effect just at the right time - pubs operators could not have asked for a better Christmas present. Yet fears of a surge in binge drinking look to be unfounded. Early estimates put the sales uplift at 1 to 2 per cent.

The other big change awaiting pubs are government plans to ban smoking in pubs and restaurants next year, with an exemption for pubs that do not serve food, though pressure is mounting on Tony Blair to impose a full ban. The implications will become clearer when Scotland's (full) ban starts in April - pub operators there are busy adding beer gardens and gas heaters to their estates to accommodate smokers.

Bans in other countries suggest that pub visitor numbers recover after the initial drop, so the ban should have a limited impact on residential pubs - but high street bars could suffer more, as customers may move on to nightclubs early where they can smoke.

Punch Taverns' recent £2.7bn acquisition of the privately-owned Spirit Group, which turned it into Britain's largest pubs company ahead of Enterprise Inns, looks to have been the last big deal in the sector for a while. But more pubs are set to change hands, with Punch poised to sell off big chunks of the Spirit estate. Mitchells & Butlers, Greene King and Wolverhampton & Dudley are all lining up for the larger managed pubs.

Enterprise Inns is our favourite stock in the sector - a well-run, cash-generative company, it has consistently delivered solid earnings growth and good dividends. Trading at 14 times 2006 earnings, the stock is not too expensive. Another favourite is Greene King, which is well placed to pick up some pubs from Punch and is cheaper than Mitchells on a multiple of prospective earnings. Luminar, the bar and night-club operator, is also worth buying, trading at only 11 times earnings though it is in need of restructuring. The jury is still out on JD Wetherspoon, which is working hard to contain pressure on its margins.

Asian exposure can drive car consultant Ricardo higher

Look through the cars in your average car park and chances are that Ricardo was involved in the development of most of them. The group is a consultant to the automotive industry and advises the world's biggest producers on anything from the design of a gearbox to the electronics behind the dashboard.

Yesterday, Ricardo assured the City that its interim results next month would not disappoint, but two years ago it was a very different story. The downturn in the car industry had wiped out profits at Ricardo and sent its shares crashing to a low of 165p in December 2003. Since then, the management has forced through a restructuring programme to slash costs and diversify by reducing reliance on key customers and moving into new territories.

As a result, Ricardo is quite a different outfit today. In the past two years the proportion of new orders accounted for by its two biggest customers has almost halved and its presence in Asia has grown fast. The most impressive growth has been in China, where the company has gone from having no revenues to generating 15 per cent of its total order intake. This part of the world will certainly be a major driver of profit growth in the years ahead and it is no surprise that Ricardo recently opened new offices in Shanghai.

The fast-growing popularity of hybrid cars also looks set to be another major source of new business for the auto consultant. The jump in the price of fuel and, to a lesser extent, environmental concerns have boosted demand for cars which have both normal combustion engines and electrical motors. Japanese manufacturers have led the way in this field but European car makers are determined to catch up and this should see new orders flow Ricardo's way.

For the current year, the group is forecast to report a pre-tax profit of about £10m. At yesterday's close of 279.25p, this leaves the group trading at 15 times prospective earnings which, although not excessive, is by no means cheap. However, Ricardo's fast-increasing exposure to both Asia and hybrid cars makes the company an interesting growth prospect and its shares a buy.

Comments