The Investment column: Morland has a lot on its plate

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The Independent Online
Morland, the Oxfordshire-based pub and brewing group most famous for its Old Speckled Hen strong ale, has read its Henley Centre forecasts as closely as anyone else and knows that the eating out market is set to grow at a handsome lick for the rest of the decade and beyond. It also knows that it has lagged its peers in the sector in building a meaningful position in the restaurants market, so yesterday's acquisition of 24 Exchange bars from Allied Domecq came as no surprise.

Exchange is a TGI Friday-style American diner which takes Morland away from its retail expertise in managed pub brands such as the Newt & Cucumber and Wig & Pen. But it has plainly been undermanaged by Allied, which has more pressing problems on its plate, and there is scope to increase Exchange's returns.

That is just as well, because with a price tag of pounds 32m, Morland will have its work cut out to generate a level of profits that matches its cost of capital. One analyst calculated that profits would have to rise from under pounds 2.5m to about pounds 4.5m to make the deal earnings enhancing. That sounds like a big leap but with half the sites suffering from flat sales in good locations where they really should be thriving the improvement should be achievable.

The deal, which is to be part financed by a one-for-six rights issue at 500p, with the rest coming from debt, was broadly welcomed by the City yesterday, with the cash call leaving the shares hardly changed. They closed 2.5p lower at 585p.

That, however, is well down on the 670p the shares reached last spring and Morland is in something of a rut, which probably reflects its slowness in hopping on the food bandwagon. Buying these bars, and the 16 pubs from Whitbread that were separately announced yesterday for pounds 3.4m, is plainly the right type of deal, but the price is full and it is not big enough to really transform the balance of Morland's business.

On a prospective price-earnings ratio in the low teens, Morland, in keeping with its peers in the regional brewing sub-sector, does not look expensive. With fairly pedestrian growth pencilled in by the brokers, however, the rating is harsh but fair.