Investment Column: Enterprise fails to lift pub sector gloom

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The Independent Online

Our view: Sell

Share price: 122.4p (-11.2p)

It has been a fairly depressing year for the pub industry and one of the sector's biggest operators, Enterprise Inns, did little to lift the gloom yesterday. The UK's second-biggest pub operator, which has 7,399 leased and tenanted pubs, said pre-tax profits tumbled by 95 per cent to £11m for the year to 30 September, after exceptional costs of £197m, largely after writing down the value of its pub estate.

Enterprise Inns warned this coming year will be "equally challenging" and it is likely to see a "further decline in trading profit" in the short term, given the economic conditions and its planned disposal of up to another 500 pubs.

The company also has the millstone around its neck of underlying net debt of £3.56bn, although this has improved from £3.70bn at the beginning of the financial year. On the surface then, investors may want to treat its shares with the caution reserved for a spiked drink, particularly as it is not paying a final dividend.

However, the pubs operator's shares – which now trade on a relatively cheap 2010 price-earning ratio of 4.4 – have more than doubled since hitting 55.5p at the end of December 2008. And the company, which owns pub assets of £5.4bn, cites several other reasons why its glass is half-full.

Of its net debt, Enterprise Inns said that £1.6bn is securitised bonds over 22 years, and £1.2bn is corporate bonds, with the next scheduled repayment not being until February 2014. Furthermore, the company is confident it will be able to refinance its £1bn banking facility by May 2011.

Enterprise Inns also wants to reintroduce dividend payments, but did not provide a timeframe yesterday. With robust cash generation, Enterprise Inns is one of the sector's most reliable long-term punts, but we think there are too many dark clouds for the next year to take a gamble. Sell.

Wellstream Holdings

Our view: Hold

Share price: 517.5p (-21p)

Wellstream, the oil field services provider, saw its shares slide by 3.9 per cent after issuing an interim management statement yesterday.

Part of this was profit taking, as the wider market paused for breath. But there was also concern about the state of the company's order book, which currently stands at £170m, compared with a backlog of £215m at the interim results stage. That in itself, Panmure Gordon points out, was down from the time of the final results. Contracts under Wellstream's agreement with Brazil's Petrobras have supported the backlog, but uncertainty remains about the timing of awards elsewhere, a state of affairs that the company says is likely to persist through the first half of 2010.

It is not all bad, however. The company is focusing on cost efficiencies, a strategy that should bear fruit as orders recover in the second half of 2010. The takeout story also remains intact, according to Evolution Securities. Wellstream often features in stock market rumours, and some traders reckon that it is only a matter of time before it is courted by one of the bigger players in oil services industry. Oil majors in particular have been rumoured to be eyeing the company.

The valuation is not prohibitive either, with the stock trading at 15.4 times Evolution's forecast earnings for the full year. The uncertainty surrounding the backlog means that we cannot justify a buy stance. But Wellstream appears to be on the right track, and we would hold back from pressing the sell button. We say Hold.

Care UK

Our view: Buy

Share price: 351p (-4p)

Care UK was supposed to be running half the National Health Service by now. When the Government was rolling out its plans for the private sector to run new mini-hospitals within the NHS, the company – for many years a provider of home helps, mental health services and nursing homes for local authorities – was in pole position to win the business.

It has opened 10 treatment centres, but the scheme is somewhat in abeyance. Worse, the first two of these existing contracts are up for renegotiation and the volume of operations referred its way is sure to drop, if it keeps the contracts at all.

Investors are right to be nervous, particularly since Care UK has been struggling with high debts, though these are now easing. Those with a strong stomach should buy back in to the shares now they have fallen from their 2007 highs, however. Two reasons to take a contrary view: first, the coming squeeze on public spending might actually encourage more use of private sector outsourcing, not less; second, private equity group Bridgepoint saw at least something in here to prompt a cheeky bid last month. It might still back a management buy-out at a premium. Buy.

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