Investment Column: Too soon to call time at Enterprise

Land Securities buoyed by shoppers' spree; Cranswick is not quite ready for consumption
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The Independent Online

Gone are the days when lashings of cheap beer were enough to pull punters into the pub, says Enterprise Inns.

Drinkers are now more discerning and want a quality pub with a quality landlord. So Enterprise's model of leasing pubs to independent, tenanted landlords is lapping up the returns.

Compare and contrast Enterprise with the high street chains that manage and run pubs themselves. Wetherspoon, Regent Inns and Eldridge Pope are all suffering a pretty bad hangover after over-supplying the market.

Enterprise, on the other hand, can now afford to bed down its acquisition of Unique pubs. It took control of the 4,000 Unique pubs in March, adding to its existing 5,000, and the cash from these has yet to start rolling in. That it has produced 15 per cent earnings growth in the past six months without Unique, and that profits in its existing pubs were up an average of 9 per cent, is a testament to the strength of Enterprise's estate. In total, interim group profits were up 16 per cent.

But tenanted pub estates do now have their own threat on the horizon. A committee of MPs has begun an investigation into the arrangements between landlords and pub companies to ensure pub tenants are not being ripped off. While Enterprise points to the fact that lease arrangements have been exonerated by the Office of Fair Trading and by British and European courts, it is, nonetheless, a cloud over the stock and may stall its progress until the investigation is concluded. Another threat is a possible smoking ban, although this, if introduced, would be phased in over a number of years.

At 578p, one of the biggest FTSE 100 movers yesterday, Enterprise is trading on 13 times forward earnings. That is dearer than Punch Taverns, but the quality of Enterprise's pub estate justifies the premium. This is a worthy, highly cash generative stock about to be turbocharged by the acquisition of Unique. Time has not yet been called on the shares, so hold on to your place at the bar.

Land Securities buoyed by shoppers' spree

Land Securities is one of the UK's biggest landlords. Some 300,000 Britons go to work at Land Securities-owned offices. And we make 300 million visits a year to its shopping centres, which now include Birmingham's new Bullring.

The company has achieved a neat balance in its portfolio between office accommodation, which has suffered a significant downturn that is only now bottoming out, and retail space, where the UK's voracious consumer spending spree has kept tills ringing, demand for space high and rents rising.

Shopping centres and retail parks account for 55 per cent of Land Securities's asset value, which it said yesterday was 1,331p per share at 31 March, up 9.2 per cent in a year. This is far better than we expected in November, when we advised avoiding the shares. It is the out-of-town retail parks that are rising fastest in value. In a trend highlighted by Dixons last month, when it closed hundreds of high street stores, the warehouses are now being divided into smaller units and attracting names such as Boots and Next.

Rental increases from the office portfolio will have to wait, at least in the City, where the downturn has been worst. However, there are signs of life in the West End office market.

At 1,078p, Land Securities sits at less of a discount to its asset value than many in the sector, but the broader picture is that demand for property investments has continued to increase. This means that Land Securities assets are being driven up in price, and the shares are still in demand. Buy.

Cranswick is not quite ready for consumption

Cranswick has proved a swine of an investment over the past 18 months. This food group, most famous for its posh sausages and hams, has suffered a couple of trading setbacks (a tough market for animal feed and the loss of part of a big contract for its newly acquired sandwich making business), the financial impact of which was compounded by the cost of investment in production facilities that weren't operating as efficiently as needed.

Yesterday's results for the year to 31 March were not what might previously have been hoped, but they did at least hit the most recent forecasts. Sales of the gourmet products are still doing well, and pet foods, too, put in a strong performance.

But there was a warning that the next six months will be hit by high raw materials prices in animal feed, particularly the cost of wheat. Thereafter, better marketing should bring home the bacon.

We said 18 months ago that Cranswick shares, then 536p, needed to shed some fat. At 351p off 3p yesterday, they are now trading on nine times Numis's forecast of earnings for the calendar year. That looks cheap compared with other companies in the food sector. Investors should wait to check that the company comes unscathed through its difficult first half, and then consider buying back in.