Investment Column: Inn Business now needs returns

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Inn Business has made an art out of buying pubs that nobody wants at a knockdown price. They have had no shortage of offers. Big brewers like Whitbread, where Inn Business chairman Alan Jackson learned his trade, are content to pump huge sums of money into their fancy themed pubs, but cannot be bothered to give the same attention to some of their sadly neglected tenanted estate. So Inn Business has been able to go on a furious buying spree, almost quadrupling its estate to 500 tenanted and 27 managed pubs in the last few years.

Now, however, Inn Business has to prove it can actually make some decent money out of its new estate by jazzing up its outlets. The game plan is to create "The Local's Local" pub. In other words, it is not going the whole hog by rebuilding the pubs, changing their character and names in the process. Instead it is sprucing up the tattiest part of its estate - adding a lick of paint or building new loos - and providing a more extensive pub grub menu.

It is also seeking to gradually build up its managed estate and roll out Hooden Horse, the eight-strong branded chain it bought earlier this year, across the South-east. As part of this shake-up, at least 50 or so less well-favoured pubs inherited from its buying spree will be sold off, including the 17-strong Welsh estate.

So far the plan is working. Ignoring acquisitions, operating profits for the six months to May jumped to pounds 2.68m (pounds 1.54m), leaping from pounds 386,000 to pounds 2.92m at the pre-tax level. House brokers Peel Hunt are forecasting current year pre-tax profits of pounds 6.45m, putting the shares, which edged up 1.5p to 66.5p yesterday, on a prospective p/e ratio of under 10.

On the face of it, that looks an unjustifiably wide discount to the sector which is trading on a prospective p/e ratio of more than 15. But Inn Business cannot afford to make another acquisition without issuing paper. Until it can prove it can make a good and sustainable return from its investment programme, the shares are no more than a hold.