Sober outlook for small brewers

THE INVESTMENT COLUMN

The silly season must be upon us. Sunburn in Britain, killer frogs in south London - now the brewers have stopped whingeing. Not a murmur in recent weeks about the Calais booze run or the penal UK tax regime. Either they are all on holiday, or the heat is getting to them.

It has certainly got to the sector's share prices, with thirsty drinkers pushing brewing and pub company shares close to their recent highs. The excitement is being whipped up further by tomorrow's change in the law allowing pubs to open all day on a Sunday. The brewers are happier than anyone can remember.

Well, some of them. Pubs brimming with customers drinking more than their normal quota is certainly helpful, but one good summer does not make a recovery and investors would be well advised to take a sober view of the festivities. It is far from clear the strong run in the sector's share prices, especially the smaller regional brewers, is justified.

Shares in Wolverhampton & Dudley Breweries, for instance, are trading within a few pence of the year's high of 563p and are not that far adrift of the all-time peak of 609p. The only justification for the shares to be at this high level is that W&D is about to make a big acquisition of pubs, or the company itself is in the acquisitive sights of one of the big guns like Bass.

The share price is certainly not justified on financial grounds. W&D faces many problems, some of its own making but mostly because it is sandwiched between the main trading grounds of its bigger rivals, Bass and Courage, shortly to become part of Scottish & Newcastle. Assuming that happens, Bass will lose its mantle as Britain's biggest brewer and the one guarantee in an uncertain industry is that it will fight for market share, squeezing smaller players.

The recent pounds 165m purchase by Bass of 75 Harvester restaurant pubs from Forte is a case in point. W&D, which has been slow off the mark in expanding in the eating-out market, can expect Bass to roll out the brand right across its patch in the Midlands.

For some of the regionals - principally those with good beer brands such as Greene King and Marston, Thomson & Evershed - the trading pressures from the consolidation at the top end of the industry will be offset by justifiable bid speculation.

The Department of Trade and Industry said again yesterday in its deliberations over the S&N and Courage deal that horizontal integration among brewers was not a big competition issue and there will undoubtedly be some bids.

But the likes of Wolves & Dudley are just not attractive enough to tempt one of the big players. When the market realises this, the shares face a thumping hangover.

Losses hamper Huntingdon

Any investor who has held shares in life sciences group Huntingdon International over the past few years will have either sold them by now or turned grey with worry. In the last two years, the company has issued three profits warnings, placed its engineering consultancy Travers Morgan in administration and sold HEE, its loss-making US environmental services division. The shares have collapsed from 348p five years ago to just 35p at the turn of the year with a recent rally to yesterday's close at 66p.

The company is reduced to its life sciences group, which tests drugs for pharmaceuticals companies. Led by company doctor Roger Pinnington, Huntingdon has made a recovery of sorts, but it looks like a long haul.

Yesterday's results for the nine months to June showed a pre-tax loss of pounds 28.5m caused by a pounds 29m exceptional charge relating to the pounds 9m sale of the US division in May. At the remaining Life Sciences business, there was good news, with operating profits 56 per cent higher at pounds 5.4m, helped by sales growth and substantially reduced central overhead costs.

A new pounds 5m laboratory opened in April and there is no shortage of work; the company is struggling with an order backlog caused by a shortage of trained staff. However, this may be helped by the jobs fall-out resulting from Glaxo's takeover of Wellcome.

Huntingdon's problem is that its recovery will be constrained by a stretched balance sheet. Debts stand at pounds 32.6m and gearing at more than 100 per cent. Analysts expect some acquisitions, but these will require a rights issue or share placing which, after the company's recent performance, is asking a lot.

House broker Kleinwort Benson is forecasting full-year losses of pounds 27.6m, followed by profits of pounds 6.2m in 1996. The shares, unchanged at 66p yesterday, trade on an unattractive forward p/e of 14 two years out.

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