Flat prospects at Greene King

Investment: Consolidation may be the only option for the regional brewing sector

THE REGIONAL BREWING sector, for so long the dullard of the pub and brewing industry, is suddenly starting to look interesting. With Wolverhampton & Dudley embroiled in a hostile bid for rival Marstons, and Greene King tipped as a possible "White Knight" bidder, the long-awaited consolidation of the market could finally be under way.

Certainly a glance at Greene King's half-year figures yesterday suggest action is necessary. Trading profits were up just 5 per cent to pounds 27m on sales up 2 per cent to pounds 134.5m. Like-for-like sales in its managed pub estate are running 3 to 4 per cent lower than last year and trading is said to be "patchy and unpredictable" in the face of weakening consumer demand. "It seems that consumers do have the money, but are frightened to spend it," said Greene King's chief executive Tim Bridge, adding that food sales are slightly weaker than drink.

All this has contributed to the shares under-performing the market by 23 per cent over the past 12 months. They have fallen from over 750p in the spring to 537.5p, down a further 1.5p yesterday.

Like other regional brewers Greene King's problem is that it is caught between the powerful big brewers, such as Bass and Scottish & Newcastle, on the one hand and the new, nimble pub companies on the other. The regional brewers cannot match the marketing spend of the big boys while the new pub companies, such as Regent Inns and JD Wetherspoon, are nibbling away at their margins.

This has led to analysts and investors shunning brewers valued at less than pounds 500m, leaving the shares trading on lowly ratings. As one sector- watcher put it yesterday: "Greene King is a small, low-growth business operating in a mature sector. It is just a case of trying to make the best of what its got."

To be fair to the company, it has been trying to do just that. Its decision to pull out of lager production last year now looks wise as Greene King could not possibly match the marketing muscle behind top brands such as Carling Black Label and Stella Artois. It has also jettisoned its Irish ale, Wexford Cream, after sales started to fall sharply.

Its beer volumes are out-performing the market and its main ales, Greene King IPA and the stronger Abbot ale, increased sales by 2 per cent in a cask conditioned market 10 per cent down.

In managed pubs the group is concentrating on acquiring and developing community pubs to the Hungry Horse brand, which offers lower-priced food. So far there are 90 Hungry Horse pubs with a further eight sites secured for the second half. However, there have been some concerns that a large investment bill for refurbishment is looming.

In the tenanted estate, which was boosted by the purchase of 43 Beards of Sussex pubs this year, profits were up 4 per cent although the benefits of an investment programme will only be felt in the second half.

Greene King may yet enter the fray for Marstons although analysts said Morland, which it took an unsuccessful tilt at a few years ago, remains its most obvious partner.

Although the shares trade on a forward multiple of just nine, analysts said the outlook remains unexciting.