Inn does the business down the pub

SMALLER COMPANIES

INN BUSINESS is a lively little pub group, valued at pounds 56.8m on the stock market. It reported a sparkling set of finals in February, when executive chairman Alan Jackson said the group would be looking to buy groups of pubs, or individual acquisitions.

Any deal over pounds 10m would require fresh funds from shareholders. Pre-tax profits at the time came in 140 per cent higher at pounds 6.3m before exceptionals. Most of this was the result of its purchase of Sycamore Taverns, which represented 40 per cent of the gain, with overall sales up 115 per cent to pounds 32.5m.

A run-down estate at Sycamore meant that improved investment and better relationships with individual tenants were translated into higher rental income and improved beer sales. Earnings per share rose 25 per cent to 7p. Most of Inn Business's estate is tenanted, and annual rents now average pounds 30,000 an outlet, a relatively high figure for the industry. That reflects the quality of the estate, the range of beers on offer and better food. More recently, amusement machine revenues have also been rising. To improve the quality of its estate, Inn Business also ran an active disposals programme, selling off 27 outlets to raise pounds 2.9m.

This year, the one-off benefits brought in by Sycamore will have faded, but there should be further solid improvement at a trading level. There is also a substantial refurbishment programme, with 125 pubs, or about a quarter of the estate, being given new exteriors. There are plans to improve electronic point of sales systems and other information technology developments.

Business was solid over the Christmas period, while January and February, traditionally the two quietest months of the year, were helped by the mild weather.

The philosophy of the group is to concentrate on the traditional local pub, especially where they have been under-managed in the past. It also has a small branded food operation, Hooden Horse, which is targeted at the 25-45 age group. This has the potential to be expanded, and returns of 20 per cent on capital are good enough to suggest that such a move would benefit shareholders. According to stockbroker Teather & Greenwood, pre-tax profits may rise to pounds 7.8m in 1998, with earnings per share of 8.3p. In 1999, the group could make pounds 9m, producing earnings per share of 9.3p. That leaves the shares on the fairly undemanding p/e of 8.2 and 7.3 times earnings respectively.

Gearing of 104 per cent should not be of any great concern, given the stability of the rental income, which covers interest charges twice over, and a strong cash flow. While the shares have underperformed the All-Share index over the last year, they look a sensible bet for the next few years. There is also the prospect of a takeover in the offing to underpin the price, possibly from Enterprise Inns. Buy.

RICHARD PHILLIPS

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