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Bass discovers the right brew

SHARES The beer and leisure group is well placed to profit from a rise in consumer spending
INVESTORS have acquired a taste for Bass. Not just for the beer to slake dry throats in the searing summer heat but for the shares in what is still Britain's biggest brewer - at least until Scottish & Newcastle finally ties the knot with Courage. Bass is also one of the largest hotel companies in the world, courtesy of its franchised Holiday Inn chain.

The company, however, has hardly been the City's favourite tipple in recent years. This year's surge in the share price to close at an all- time high of 680p on Friday has caused a bit of surprise.

Part of the difficulty in assessing the company is caused by the way stockbrokers analyse it. Since Bass bought Holiday Inn, there have been wide differences of opinion among leisure analysts - who follow the company because of its involvement in hotels and Gala bingo clubs - and the legion of drinks gurus, who focus on its brewing, pubs and Britvic soft drinks operations.

Only last year, for instance, the highly rated leisure team at Kleinwort Benson was recommending Bass shares as a strong buy, because of encouraging prospects for Holiday Inn. At the same time, it was difficult to find a brewing analyst to say a good thing about the company's management, headed by Sir Ian Prosser.

The brewing industry is now becoming so intertwined with the leisure industry that it can only be a matter of time before research departments in City broking houses do the same with their separate teams of analysts. The Stock Exchange is already thinking about reclassifying the brewing sector into food and pubs.

Meanwhile, investors will have to suffer the conflicting signals sent out by City scribblers every time Bass makes a statement.

Investment views on Bass are also clouded by the pending consolidation in the brewing industry. Scottish & Newcastle's purchase of Courage is probably only the tip of an iceberg of potential takeovers and mergers. They will undoubtedly involve Bass opening its bulging wallet to buy companies, possibly as large as Carlsberg-Tetley, the third-largest brewer in the UK.

The company's financial power was amply demonstrated only a fortnight ago, when it dipped into its small change to relieve Forte of its 75-strong chain of Harvester restaurant pubs for pounds 165m. To put that figure into perspective, capital expenditure by Bass over the past five years has amounted to almost pounds 2.9bn - equal to pounds 1.56m for every day of the week.

Cash flow from operating activities over the same period has exceeded pounds 3.6bn, and only in the past two years has there been a net outflow because of expenditure on new bingo halls, other leisure operations and refurb- ishing pubs. The total outflow, however, was small at pounds 45m, and gearing has only inched up towards 50 per cent of shareholders' funds, last stated at pounds 4.4bn.

Where Bass scores really highly, though, is on cost control. Staffing levels have come down significantly. The company is also turning out to be a great innovator of management systems, from electronic point-of-sale tills in pubs to one-stop booking for globe-hopping business travellers.

The financial impact of cost-control measures and management innovation has been strong. Group profits before tax have climbed unabated from pounds 376m in 1990 to pounds 552m in 1994, despite the recession and the controversial Beer Orders, which forced Bass to sell a couple of thousand pubs.

Success in the UK, which still accounts for 75 per cent of profits, owes much to the strength of the company's brands and its repositioning in the rapidly changing brewing and pub markets.

Beer brands include the best-selling Carling Black Label lager, a name used to sponsor Premier league football, and the traditional Bass IPA. The consumers' growing liking for stronger, premium-priced beers has seen Bass launch Caffrey's Irish Ale and Staropramen, a Czech lager.

Bass is confronting the decline in beer drinking in the UK by investing heavily but very selectively in its brewing and pub operations. These soak up slightly over a third of capital spending, with the money spent right down the line from improving production efficiency through to fast- delivery beer taps on the pub bar.

In hotels, the Holiday Inn chain is well placed to cash in on the recovery in bookings and accompanying rise in room charges, particularly in the main market in the Americas. Franchise fees are also rising for new hotels, from 4 to 5 per cent of turnover.

Overall, Bass is well placed to benefit from a pick-up in UK consumer spending and is neatly locked into the international hotel market, which can only improve. The shares, despite this year's rise, look good value. Analysts expect profits to rise beyond pounds 590m this year, giving earnings per share of around 43p. At 674p, the shares trade on an undemanding price earnings multiple of 15.5 and yield a gross 4 per cent, assuming dividends rise 7 per cent to 22.6p.

Activities Brewing, pubs, hotels, bingo, betting shops and maker of amusement and gaming machines.

Share price 680p Prospective yield 4.2% Prospective price-earnings ratio (1994/5) 15.7 Dividend cover 1.9 1992/3 1993/4 1994/5*

Sales pounds 4.451bn pounds 4.452bn pounds 4.6bn Profit before tax pounds 508m pounds 552m pounds 593m Earnings per share 36.3p 40.1p 43.2p Net dividend 19.8 21.1 22.7 (*Credit Lyonnais Laing forecast)