The Investment Column: Time to cash in some of the froth in Enterprise Inns' share price

Improving Innovation worth a buy; Signet is a gem to hold despite UK weakness
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The Independent Online

Ted Tuppen may be the chief executive of the UK's biggest pub landlord, but he is no Al Murray. His views on the details of the new smoking ban (ridiculous) and the causes of binge drinking (the behaviour of a small minority, and caused mainly by factors other than irresponsible landlords) are outspoken but they are well-grounded, and the financial results from Enterprise Inns demonstrated again yesterday that he has a solid touch when it comes to knowing what makes a good pub. His view is that the new licensing laws coming into force at midnight, which allow extended opening hours, will increase profitability only marginally, but that it will at least help offset any weakness in consumer spending.

Enterprise has been a remarkable creation, a portfolio of 8,590 local boozers assembled through a string of giant acquisitions over the past 14 years. Those big deals are over, and the effort now will be in sprucing up the portfolio. In part, that means investing with its tenant-landlords in business expansion plans and upgraded facilities. But mainly it means selling the dull financial performers in the portfolio and buying small numbers of new outlets. The key number in this phase of growth will be operating profit per pub, which in the year to 30 September was up 8 per cent.

Enterprise harvests rents from its tenant-landlords, rather than running the pubs directly, so its finances are predictable and stable. That means it can carry the weight of large debts and afford to give big sums back to shareholders. The dividend was raised by 50 per cent this year and looks set to go up a similar amount in the current financial year. There is also a £200m share buy-back that will support the share price in the months ahead.

The difficulty is that the shares, which surged to a new record high yesterday, look mispriced. The dividend yield on the shares rises to 3 per cent this year, but that is still below the market average. The market has got used to 30 per cent annual earnings growth from Enterprise and will have to get used to perhaps two-thirds less, making a share price of 13 times earnings look too heady.

The disruption in the licensing trade makes now a good time for shareholders to take some of their considerable profits.

Improving Innovation worth a buy

The Innovation Group occupies a healthy niche in the tech sector, offering policy management software to insurance companies. These can either buy or rent the software or outsource their claims management to TiG. The group's call centres are used to speak to claimants and to tout for new business.

Deregulation within the insurance industry is inspiring new entrants such as banks, supermarkets and car makers to add insurance to their services, widening TiG's target market. So the outsourcing part of the business is growing strongly, with annual sales up from £25m to £35m, with particularly stellar growth in South Africa where TiG is the market leader.

The figures released yesterday mask these brighter prospects. TiG reported a wider annual pre-tax loss of £11m following lost software licence sales. The group is moving away from volatile licence sales and, including outsourcing, recurring revenues are now two-thirds of total income.

The shares, down 24 per cent this year, are back close to where we said avoid in August last year, and look cheap now that City analysts reckon on a material improvement in profits next year. A share price of 13 times forecast earnings compares with a sector average of over 15 times. Buy.

Signet is a gem to hold despite UK weakness

Terry Burman, the chief executive of the jewellery group Signet, which owns H Samuel and Ernest Jones in the UK, was being particularly cryptic this month when he said "the range of analysts' pre-tax profit estimates for the year as a whole should be wider than presently forecast, with an upper level no higher than that of last year".

For wider, read lower. Jewellery is the sort of luxury being ditched by the mid-market consumer, now that spending habits are less profligate. Signet's UK business showed a 7 per cent drop in sales in the nine months to 30 September, we learned yesterday, and plunged into the red, meaning profits for the group as a whole were flat.

The bigger part of the group, the US business, is performing much better. Accounting for 70 per cent of annual sales, it comprises 1,183 stores under the Kay Jewelers and Jared brands. Sales in the US are running up 7 per cent and operating profits are 20 per cent ahead of last year. Consumer spending there is robust, even as concerns over a house price bubble are growing. Both Kay and Jared are upping their advertising spending before Christmas, which accounts for 40 per cent of annual sales, and will therefore be crucial to the short-term outlook for the shares.

Longer-term, Signet has spotted the popularity of diamonds and has been expanding these ranges aggressively. Rising raw materials costs, the price of gold in particular, are being offset by internal savings. Signet is well run, and its shares are cheaper now than when we said avoid last year. If you have them, hold.