The Investment Column: W&D decides to stop the rot

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The Independent Online
Investors in Wolverhampton and Dudley must be tempted to head down to the pub for a stiff drink to drown their sorrows.

In the past few months, shares in the Midlands brewer and pub group have slumped alarmingly. The stock has fallen from 705p to 457.5p, despite recovering 6p yesterday.

W&D's main problem has been the poor returns it has made from its ambitious capital expenditure programme.

It invested its money in some dodgy pub brands which have subsequently flopped.

Trade has been hit by competition from the huge number of rival theme pubs springing up all around the country.

W&D's staff costs ran well over budget, due to poor controls, adding to the misery.

Throw in the fact that there was unexpected fall in the number of pints drunk by British drinkers in the summer and it is easy to see why W&D's profits for the year to September remained flat at pounds 43.1m.

W&D has decided to stop the rot by admitting failure and reining back on its spending programme.

Given its past record, it has sensibly decided to use the extra cash to buy back up to 15 per cent of its shares. The share buy-back should enhance earnings and help steady the share price.

W&D has also been able to get rid of some of its worst tenanted pubs and it has some scope to edge up margins as it gets costs under control. However analysts believe W&D will have to work hard to achieve anything more than pedestrian profit growth over the next few years.

Its Banks's beer remains a popular pint, but volumes continue to fall in a declining market.

Panmure Gordon forecasts current-year profits of pounds 45.5m, putting the shares on a prospective p/e ratio of 9.

With the stock now sitting on a steep discount to even the depressed brewing sector, shareholders should hold on and hope W&D can get it right this year.

However the shares will not start to look attractive until W&D proves it can start producing acceptable returns on its investment.