Investment Column: Pub grub and revamps give Spirit strength

Hydrogen; Motive Television

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Our view: buy       

Share price: 38p (-0.51p)

Long before the pub group's demerger at the start of August, the City had largely labelled the managed operation Spirit Pub Company as a far more attractive proposition than the leased pub group Punch Taverns.

The maiden results from the two de-merged companies last week did little to dispel this view, with Spirit continuing to buck the economic downturn and Punch posting a 5 per cent fall in gross profits.

While we would not put our money behind Punch, the investment case for Spirit holds much in the way of short- and long-term promise. The group, which manages 804 pubs directly and has a further 548 leased outlets, hailed the performance of its refurbished pubs and food for driving a 3.8 per cent jump in underlying sales for the 12 weeks to 20 August.

While these figures were down marginally on the 5.2 per cent leap over the 52 weeks, Spirit cranked up its food sales by an impressive 7.9 per cent in the final quarter.

In addition to strong demand for its pub grub, Spirit also benefited from its "intensive" refurbishment programme, which has seen 215 of its pubs spruced up over the year. The group has now refurbished 60 per cent of its estate, including the investment made in previous years, and there is plenty more to come.

As Spirit focuses its expansion on its Chef & Brewer, Fayre & Square and Flaming Grill brands, it has already started the conversion of up to 100 leased pubs to its better-performing managed outlets. We see this programme as vital to continued growth, as the model of directly managing pubs proved to be a winner during and after the last recession.

Reflecting its thinking on conversions, Spirit's leased division booked a 3.3 per cent fall in its fourth-quarter net income. However, with Spirit trading on an undemanding forward earnings multiple of 6.4, we think that without its struggling sister the managed group is one to watch.


Our view: buy

Share price: 97.5p (+1p)

Hydrogen issued a strong set of numbers yesterday. The specialist recruiter booked £80m in revenues in the six months to the end of June, up 45 per cent on the year, with £15.1m in net fee income, the key industry metric.

The latter, up 14 per cent on 2010, is almost back to the levels seen before the economic slump.

If you're keeping score, the low point was the first half of 2009, when net fee income fell to just under £8m.

Looking ahead, the outlook for the world economy is not encouraging. That bodes ill for labour market trends in mature economies like the UK. But Hydrogen has an ace up its sleeve. It has been investing in its international operations, and opened an office in Hong Kong in April. Recent months have also seen increased investment in existing offices in Australia and Singapore. This shows management has an eye on long-term growth.

Adding to the attraction is the fact that, despite making sensible investments in its business and posting higher profits, the stock trades on multiples of less than 10 times forward earnings for this year, falling to under eight times on the estimates for next year, according FinnCap.

Motive Television

Our view: hold

Share price: 0.28p (unchanged)

Motive Television has had to undergo several very painful restructurings in the past few years, but there was a spring in its step yesterday as it revealed "significant progress" with a major contract.

The company has come a long way since investing in TV production, a business it was forced to pull out of several years ago. It has also had to restructure and combine its digital TV technology business in the first half of the year.

The group, which makes kit allowing viewers to transfer shows from a set top box to another device without the internet, announced its major client Sagemcom was close to field-testing satellite TV set top boxes containing its gear in Turkey. The contract is significant, bringing in $1.1m (£683,000) in its first year and ongoing royalties.

This could pave the way for further wins, according to analysts at Edison. The revenue numbers look good, almost trebling in the first half. Yet, the cost of overhauling the business saw its losses do the same.

Edison predicts the company will be profitable in two years. The worst seems to be over, but it is still a gamble.