Cheers! Pubs will add fizz to your portfolio

Glass half full but beware the risk of a hangover

HIGH Street retailers might be drowning their sorrows after a tough festive period, but Britain’s pub groups have been on the crest of a post-Christmas wave.

The four stock market-listed chains that have already revealed their winter trading results all reported higher sales than last time, kicking the New Year off with a bang.

Analysts are concerned that consumers are tightening the purse strings as shoppers have shunned chains from Marks & Spencer to Debenhams. But the updates from the likes of The City Pub Company, Greene King, Revolution Bars and Mitchells & Butlers have shown people are still thirsty for a pint.

Pub groups haven’t had it easy in recent years, and savers may be wary of propping up the bar, so to speak. Beer sales in UK pubs and bars fell to 12,635 barrels in 2017 from 18,737 a decade earlier, according to statistics from the British Beer and Pub Association.

As with the retailers, rising rents and business rates have hit the sector. Some chains are still struggling under the huge debt burdens they were encouraged to take on in the early noughties.

After a slew of mergers and takeovers, by 2012 more than a fifth of the UK’s pubs were owned by Enterprise Inns and Punch Taverns. Their combined debt was £5.4bn – pretty hefty compared with their combined market value of just £250m. A lot has changed since then. Enterprise Inns, now Ei Group, is worth £911m. This month, it sold 370 properties to help reduce its debt to six times its earnings. Punch Taverns was split up, and part of the estate sold to brewing giant Heineken.

Over the last 20 years, other firms have hit the stock market including Shepherd Neame, Young & Co’s, The City Pub Company and Mitchells & Butlers.

According to broker Berenberg, there may now be opportunities to find value in the pub sector although there will still be good picks and bad.

Analyst Owen Shirley thinks cheap-and-cheerful Wetherspoons could steal more customers through its value-for-money prices and innovation.

It launched an app in 2017 which allows customers to order food and drink without leaving their table. The City Pub Company, on the other hand, owns a more eclectic selection of high quality premises.

With little debt Shirley says it could be in a good position to expand rapidly. Already shares have built up a 21.5pc gain so far this year as it revealed Christmas sales rose by 7pc.

Ei Group is set for a ‘transformational year’, Shirley adds, as it reduces its debt and makes itself a less risky choice for investors.

Greene King’s festive sales were up 10.9pc, and the announcement added £95.5m onto its market value as shares rose 5.6pc in a day.

AlTHOUGH this will have given investors some cheer, it could be short-lived. In order to boost sales growth, Shirley points out, it seems Greene King is having to discount.

Richard Marwood, who manages Royal london’s UK Dividend Growth Fund and UK Income with Growth Trust, owns shares in Greene King mainly because the dividend has been reliable.

This could, however, be a strait jacket, according to Shirley, as continuing to meet the payments is giving the pub group little room to pay off its debt. For similar reasons Shirley would steer investors away from Marston’s.

Brexit uncertainty may also present more problems for pubs. Many rely on low-cost labour and employ staff from the EU. There could be a problem with staff shortages or if the minimum wage is hiked.

Investors should keep an eye out for lazy and unimaginative chains.

Marwood says the way people use pubs has ‘changed a fair bit over time’, pointing out that the volumes of beer drunk have gone down over the years, and that customers go to pubs to eat rather than just to drink.

The City Pub Company’s executive chairman Clive Watson, for example, says his pubs are always trying new ideas.

‘We’ve worked hard to provide a wider range of craft beers, offer new vegan and vegetarian food,’ he explains.

Though there are clearly challenges, Shirley is convinced that The City Pub Company, Wetherspoons, Ei Group and Fuller’s could be a strong buying opportunity.

As Marwood points out, no matter what happens, ‘people will always want to go out for drinks’.