Little to cheer at Vaux

Sir Paul Nicholson was getting pretty huffy on a range of subjects yesterday - the Lottery, beer duty - but especially the 14p fall in Vaux's share price to 252p despite a 9 per cent rise in profits for the year to September. The fall means the shares trade on a yield of more than 5 per cent, well above the market average.

He should hardly have been surprised by the reaction of the City, which was disappointed by the headline profit number of pounds 31.8m and a modest 3.6 per cent rise in the dividend to 10.2p. Analysts also had their worst fears confirmed by the curate's egg of a divisional split which showed buoyant hotels and managed pubs offset by Vaux's core tenanted pubs and its main diversification, nursing homes.

Vaux picked up a lot of its 792 tenancies recently as part of the restructuring of the brewing industry since the beer orders and it is becoming increasingly clear that it acquired an extremely mixed bag. According to the company's own estimate only a fifth of sales are through pubs it considers to be in a good location, in good condition and with good facilities.

That would not matter so much if most of the remainder were not in such poor locations that upgrading them is not a viable option. Buying a market for Vaux's brewery output seemed like a good idea but getting rid of a long tail of underperforming pubs is a heavy price to pay.

In Vaux's part of the world, the closure of the Durham collieries, a greater enthusiasm than elsewhere for the attractions of the National Lottery and a steady stream up the A1 of vans loaded down with illegal booze from the Continent, led to a 6.3 per cent decline in beer sales, a poor showing compared with a 4 per cent slide in the tied market as a whole.

In nursing homes, underlying profits were flat. Delays in registration of new residents meant that they were spending less time in the homes than was previously the case. Uncertainty over the funding of long-term care added to the uncertainty.

After sharply higher rents, however, profits slipped a worrying 14 per cent and it is not wholly apparent what Vaux has to offer that a specialist in the area does not.

These two problem areas took the shine off an impressive performance from Swallow Hotels, where occupancy increased to 68 per cent, equal to the best ever achieved, and profits grew a useful 25 per cent to pounds 19.7m. Managed pubs, flavour of the month in the City, increased 12 per cent to pounds 7.6m although that is still only half the profit from tenancies.

On the basis of a prospective price/earnings ratio of 14, the shares are high enough, especially given the slow growth ahead. The shares should be supported by their high yield but they won't excite.