Greene King conjures up Magic

The Investment Column

Regional brewer Greene King seems to have conjured up a great deal when it acquired the Magic Pub chain for pounds 197m just under a year ago. The 270 pubs it bought, trading under well known brand names such as Hungry Horse and King's Fayre, have produced sparkling maiden operating profits of pounds 17.2m for the first 43 weeks under the East Anglian group's control. This contribution enabled Greene King to post a 49 per cent rise in pre-tax profits to pounds 36.7m, ignoring pounds 16m of restructuring costs.

The Magic Pub deal has doubled Greene King's managed pub estate and, by holding on to most of the acquired group's management, the brewer has also picked up the retail nous to expand rapidly in this fast growing sector of the market. Ten of its old pubs have already been converted to the Hungry Horse format and the results have been so successful that it plans to convert another 17 pubs in the next 12 months.

Given that Greene King is still making returns of more than 15 per cent on each new managed pub it opens, prospects for the estate look excellent. Conversely, profits at the tenanted pubs and brewing division will grow at a more pedestrian rate.

The fall in like-for-like sales of the Greene King IPA brand is testament to a difficult beer market, but brewing earnings cut from pounds 7.1m to pounds 6.6m was due to the higher costs associated with promoting the new Wexford Irish Ale brand.

Government plans to force brewers to provide beer drinkers with a full pint, which would probably require them to stock new glasses, and the introduction of a minimum wage will both certainly add to Greene King's costs. But it should be able pass these costs on.

Greene King is the pick of the regional brewers. Broker Merrill Lynch reckons it will be able to grow earnings by up to 15 per cent a year for the foreseeable future, with analysts forecasting current year profits of around pounds 44m-pounds 45m, putting the shares, up 6p at 653.5p, on an inexpensive prospective price/earnings ratio of 12.

Rumours are also rife it is ready to scoop up Gibbs Mew, the Salisbury- based brewer. Good value.