Punch drunk in early rounds
British pub business looks slow for now
WHEN INVESTMENT COMPANY Halogen disposed of its Zimbabwean gold mining assets early in 2007, directors stressed the main investment criteria in the future would be to find “a well-established, profitable, cash generative British business with a competent management team in place”.
At this point you could say with certainty that Halogen at least delivered on one of those criteria: it found a British business in the form of Heartstone Inns, a fledgling English pub chain. However, Heartstone is neither well established, profitable nor cash generative. Whether management – headed by Stuart Hawthorn and James Birch – is competent will depend on how well Heartstone can trade robustly through what hasn’t exactly looked like a balmy English summer.
Halogen’s interim results to end-March – now devoid of extraordinary profits made on selling gold interests – look terribly under the weather. The £3m invested in Heartstone has now been written down to £2,8m, which is understandable, since Halogen’s share of the pub business was a £160 000 loss. That’s not a great start by Heartstone – especially since the cost of Halogen maintaining its Luxembourg listing is stacking up. Professional costs associated with the listing already top £100 000.
In a letter to shareholders, chairman David Marshall said Halogen had taken professional advice on how to restructure the group to mitigate compliance costs. One proposal is to cancel the group’s listing in Harare. But, more interestingly, Marshall noted: “We will continue to investigate opportunities to minimise operating costs for the group, which might involve changes to the domicile of the group and further changes to the arrangements for trading Halogen shares.” Could that mean an end to its JSE listing?
As regards operational matters, Marshall said there had been a slowdown in the rate at which Heartstone was managing to acquire additional pubs. He said there was a scarcity of suitable pubs coming on to the market, which contrasts a statement made in May last year when shareholders were told “Heartstone has a strong pipeline of potential future acquisitions”. Marshall admitted that if the trend continued “it will push back the date at which Heartstone will become consistently profitable”.
Currently, Heartstone operates four rural pubs – The Cricketer, The Butchers Arms, the Diggers Rest and the recently acquired Hare & Hounds in Devon (which has doubled the group’s turnover). An extract from a trading statement from Heartstone doesn’t make cheerful reading: “Since the beginning of 2008 we have started to feel the impact of consumers reining in their spending. At this stage it’s difficult to quantify the impact of the broader economic situation, beyond saying that we’re certainly experiencing a slowdown.”
Matters haven’t been helped by the smoking ban in England, which reportedly has adversely impacted pub footfalls and sales. Heartstone says April trading was poor (economic gloom, coupled with holidays and poor weather) but saw a strong recovery in sales.
It would seem a lot is riding on the last few months of the English summer. But it seems reasonable to expect Halogen may have to pour in further capital before Heartstone turns on the cash flow taps. Fortunately, just more than 500 000 of 620 000 warrants to subscribe for shares in Halogen were exercised, raising around £500 000 ( R7,7m) in new capital.