Pubs turn to grub to survive

Published on Thursday 2 July 2009 21:03

Scrutineer

Greene King

422.25pp +12.25p

ProStrakan

88pp +0.0p

GREENE King's warning that the outlook for its Belhaven business in Scotland is one of caution because of fears of job losses in the public sector raises a number of questions.

Is this because private-sector workers – so far harder hit by the recession – did not drink at their pubs in the first place?

Or, more likely, a sign of how widely the ripple effect will be when the government, of whatever colour, starts cutting spending?

Greene King chief executive Rooney Anand insists yesterday's warning was simply prudent, highlighting a possible risk to the business.

A sharp cut in public spending is likely to have an impact on a large section of the company's client base, disproportionately so in the large Scottish public sector, but hitting the UK economy in general.

Aside from that blemish on their prospects, Greene King is well positioned to take advantage of the problems lagging consumer spending are throwing up.

Chiefly, by raising more than 200 million in a rights issue this year, the company has reduced its debt levels and given itself room to buy pubs from weaker rivals on the cheap.

It recently added four pubs in Scotland from rival Punch Taverns, sites that Anand said were "excellent".

Expect Anand to talk up the prospects of future acquisitions too as rivals offload quality pubs to raise cash. Yesterday he said that "assets (are] being offered to us that would not, under normal circumstances, be offered".

And the decision to hold the dividend at 15.1p, when most rivals are cutting or suspending, is a sign that it is confident it can continue to generate cash even as unemployment continues to rise.

As well as financial strength, the company is well positioned to recover from previous knocks to the industry, such as the smoking ban.

Pub groups have tried to improve the food on offer, offsetting the loss of custom from the smoking ban. The strategy has proved successful, particularly in the Belhaven pubs.

When it bought the Scottish business in 2005, food represented less than 10 per cent of Belhaven's sales at its pubs. In the year to May 3, 2009, it had risen to a quarter.

Looking forward, food sales are one area which can boost pub trade during the tough times. Consumers are likely to trade down from more expensive venues to the local pub, but will only do so when the local gets its menu right.

And food was one of many improvements at Belhaven, the strongest of any of Greene King's businesses, where revenue climbed 9.9 per cent (against just 1.3 per cent for the group as a whole) while operating profits rose 11.9 per cent to a record 30.2m.

For all the positives, though, Greene King's revenues will be dictated by the economy, and by unemployment in particular.

While many economic indicators have suggested that the "green shoots" are on their way, unemployment is likely to continue to rise until 2010.

Greene King, like all pub companies, will suffer as more and more customers lose their jobs. But with financial strength and a business model better suited to attracting price-conscious punters, Greene King's prospects are, at least, stronger than most.

MILESTONES for pharmaceuticals companies, or at least smaller ones, come thick and fast in early development. Yesterday ProStrakan cleared another key hurdle on its path to maturity.

For more than two years it has been engaged in a legal dispute with Aventis Pharma – part of the French pharma giant Sanofi Aventis – over the sale of drug discovery business ProSkelia. Yesterday it agreed to pay 9.15m to end the dispute.

ProStrakan (which was at the time simply called Strakan) bought ProSkelia in 2004 from Aventis, and at the time agreed not to sell the business itself, as this would create a tax bill for its original owner.

When ProStrakan feared ProSkelia could exhaust the group's cash reserves, it took the hard decision to sell the business and face the consequences.

Chief executive Wilson Totten said yesterday that the dispute had not been a major distraction, but some analysts believed investors thought it was a key issue needing to be resolved.

With this in mind, it must have been tempting for Totten and the board to simply capitulate, and agree to pay the entire 13.4m that Aventis's lawyers had demanded in March, just to be rid of the issue.

Instead of taking the easy path, the company has made another better than expected announcement, and in doing so, its stocks in the City must continue to rise, even before it hits the black.

Bryan Johnston of Brewin Dolphin

ONE TO WATCH

Hill & Smith

220.5p -7.5p

Scotsman says HOLD

HILL & Smith is a leading UK supplier of infrastructure products and galvanising services to a variety of markets both at home and abroad. The company has a particularly high exposure to the transport sector, which is undergoing a period of strong investment underpinned by governments' legislation and spending.

The company is one of the largest suppliers of galvanised steel in the UK and more recently the group has built leading positions in the area of transport infrastructure. Hill & Smith produces products such as road safety barriers, overhead gantries and variable message signs for use on motorways and freeways in the US.

Revenue growth is driven by capital expenditure on infrastructure projects primarily for the road and rail networks which is supplemented by the oil & gas and power generation industries. Hill & Smith's main end markets are driven by legislation and the company is an obvious beneficiary of stimulus packages, most pertinently the $27.5 billion targeted at modernising the US transport network.

The company has a good track record of bringing new products to the market and a recent example of its innovation is TopDeck.

TopDeck is a temporary parking platform that can be used to expand exisiting facilities at places such as airports, hospitals and railway stations.

Hill & Smith is trading at a discount to the UK engineering sector, possibly because the company has a relatively high debt position. That said, net debt is forecast to fall by 25 million this year and 20m in 2010, thereby cutting it by one third . In addition to a modest valuation, the company yields in excess of 5 per cent.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

Aberdeen Asset Management hit as shares fall worldwide

SCOTS STOCKS

FALLING worldwide stock markets hit fund managers yesterday, with Aberdeen Asset Management dropping 3 per cent the day after completing a deal to take it clear of rival Schroders and become the largest independent in the UK sector. Shares fell 3.75p to 123.25p.

Venture Production, which rose to its highest level in more than a year on Wednesday when it gave a positive operational update, eased 2.3 per cent to 817p.

Dana Petroleum, which has been climbing on persistent bid rumours, slipped 2.6 per cent to 1,380p. Cairn Energy, Scotland's largest oil company, rose 11p to 2,340p.

Wood Group, the international oil services group based in Aberdeen, eased 1.75p to 267.25, despite analysts at Merrill Lynch upgrading the shares to "neutral", with a 295p target price.

Shares in pharmaceutical group ProStrakan were unchanged at 88p despite the firm announcing the settlement of a long-running dispute with Aventis, at a cost below what some analysts were forecasting.

Elsewhere in the sector, Dundee-based medical diagnostics company Axis-Shield rose 4.4 per cent to 349.75p.

Optos, the retinal scanning company, dropped a penny to 72p.

British Polythene Industries, which leapt on a positive trading statement on Wednesday, climbed another 2p to 160p.

This was its highest level since mid-February.

Eros cashes in on Bollywood's popularity

SMALL BUT BEAUTIFUL

BOLLYWOOD film distributor Eros was on target again last year, delivering its third year of strong revenue and profit growth.

Revenue in the year to 31 March surged to $156.7 million (95m) from $113m the year before, despite currency headwinds related to the value of the Indian rupee against the US dollar.

Revenue from the theatrical division of the Eros global distribution network fell from $52.1m to $46.3m, although turnover rose on a constant currency basis.

Television revenues grew 94 per cent to $64m from $33m, while income from its new media division improved 69 per cent to $46.2m from $27.7m.

Profit before tax climbed to $48.4m from $45.5m a year earlier.

"With a large slate of global releases planned for 2009-10… whose production costs are already substantially funded, the company expects to generate healthy cash flows and reduce net debt over the next 12 months," said Kishore Lulla, chairman and chief executive of Eros.

The Aim-listed company said it was contemplating moving its listing to the full market and is also exploring the possibility of a listing in India.