Investment Column: Raise a glass to undervalued Greene King

Game Group; Photo-Me International
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Our view: Buy

Share price: 422.25p (+11.25p)

The pub groups have had rather a bad press in the last few months. Most got themselves embroiled in borrowing far too much debt in the good years and are now struggling to stay afloat, asking shareholders in many cases to stump up the money to bail them out. Smoking bans, wet summers and cheap booze at supermarkets has hardly helped the situation.

Greene King, the pub operator and brewer, reckons it is in a much better position than many of its rivals. The group issued its full-year numbers yesterday, saying that profits fell by 15 per cent, which beat most analysts' expectations and led to a 3 per cent rise in the share price.

The chief executive, Rooney Anand, says the group, unlike its rivals, is achieving the Holy Trinity of running pubs. It is increasing capital spending, cutting debt and still paying a dividend.

The thing that would give Mr Anand God-like status among investors is a rise in the share price. According to watchers at Numis, the stock still trades at a discount to the sector, despite the impressive operational performance. "Our 460p target price equates to 9.1 times 2010 enterprise value to Ebitda, a small, but justifiable premium to the peer group average (on nine times)," they say.

We would be tempted to take a punt on Greene King. It is certainly one of the more impressive names in the sector and has the proceeds from its £200m rights issue to spend on acquisitions in the coming months. Buy.

Game Group

Our view: Buy

Share price: 142p (-22p)

The debate about the video game retailer Game has always been: is it a brilliantly well run company, or is it dependent on the quality of the offerings from the game makers?

After the group's first-half figures, published yesterday, we have the answer. Like-for-like sales fell 15.4 per cent, which its chief executive, Lisa Morgan, said was in line with the board's expectations. The reason for the fall, she says, is that the group faced tough numbers from last year after a raft of popular games appeared in the first half of 2008.

The fall in like-for-like sales was not expected by investors, with the share price falling by 13.4 per cent, and a number of analysts trimmed their full-year numbers, despite Ms Morgan's insistence that games in the second half of the year will impress even credit-crunched consumers.

The group blamed the share price falls on investors not fully understanding the investment case and only looking at the first-half drop in sales. For those that did not read the announcement properly, margins will grow by between 150 and 175 basis points, while the group will save £16m from the completed integration of Gamestation stores.

The drop in the share price yesterday also presents an opportunity for buyers. "Game remains a retailer with a market leading position in a category benefiting from the withdrawal of capacity, cash on the balance sheet, and a lowly rating," say the watchers at Numis.

Yesterday's numbers were inglorious, but we do think there is value in the shares and for that reason we would be buyers. Buy.

Photo-Me International

Our view: Buy

Share price: 18.25p (1.75p)

We are usually a bit cynical when a company announces, often to much fanfare, that it is to conduct an operational review. Usually it is shorthand for "everything is going wrong, let's give shareholders the impression we are doing something proactive".

In the case of Photo-Me International, the photo booth maker, it appears to be working, however. A year ago, faced with heavy debts and poor numbers, the group said it would go through a period of self-improvement. A year on, debt has halved and is falling, the group has turned an underlying profit and the share price is up.

The chairman, Hugo Swire, concedes that the group still has more to do, and is adamant that, to be taken seriously, Photo-Me needs to resume dividend payments. We would agree, but we are impressed by the progress the group has made over the last 12 months. Debt will continue to fall and the undervalued stock will rise, promises Mr Swire.

While all this is to be applauded, there is a risk that is wider than simply the effects of the recession. The architect of Photo-Me's revival, its chief executive, Thierry Barel, leaves the group today for a better job in France. While the search is on for a replacement, investors should be concerned that the hero of the hour is leaving.

Nonetheless, punters should be impressed by the improvements the company has made and now have the opportunity to buy what is still a cheap stock. Buy.

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