Greenalls shares lack sparkle; The Investment Column

Despite being one of the market's success stories during the 1990s, pub and hotel group Greenalls always seems to provide analysts with something to worry about. If it isn't depreciation charges on pub freeholds or indifferent summer weather or suspect cashflow, it is the merger of Bass and Carlsberg- Tetley and the effect that will have on the price of beer.

The shares have underperformed the rest of the market by 6 per cent over the past three months, despite a bullish trading statement a month ago that laid most fears to rest.

From sleepy family brewer, with arcane share structure to boot, Greenalls has grown through astute acquisitions to the point where it flirted with FTSE 100 membership earlier this year. Along the way it has become one of the UK's leading leisure companies, slugging it out with Whitbread in some of the fastest-growing segments of the industry - managed pubs, hotels and travel lodges.

Like Whitbread, it read the runes well in the wake of the 1989 Beer Orders and realised there was a better future in the retailing of beer than in its manufacture. It has watched the dwindling returns from the likes of Carlsberg-Tetley from the sidelines over the past few years and has made its feelings clear to the OFT about further consolidation in the beerage. What is bad for the brewers in terms of overcapacity is ultimately good news for the buyers of discounted beer and there is no bigger buyer than Greenalls.

Greenalls is operating in some benign markets just now. Hotels are benefiting from a demographic shift that is seeing older, wealthier people taking more weekend breaks, and a cyclical upturn that is seeing more tourists filling British rooms. The food element of pub trade is on a seemingly inexorable upward tack as we eat more frequently out of the home and as food sales rise, drinks sales are dragged along with them.

So why are the shares in the doldrums? Partly, there is a real fear that a combined Bass/Carlsberg operation would use its increased clout to push up the price of Greenalls' most important input cost. There are worries that the company is rather better at spending cash than generating it, although investment spending of over pounds 150m a year is likely to be, at worst, cash neutral.

Finally, although Greenalls has proved adept at buying profits, it is less good at turning them into improved earnings, which have improved at less than 10 per cent a year for the past three years and are forecast to grow at only 11 per cent in the year just finished and only 6 per cent in the next 12 months. Against that backdrop, a prospective price/earnings ratio of 14 is unlikely to improve much and the shares, at 568p, will continue dull.