An intoxicating time for brewers
By
Simon Wilson Dec 05, 2005
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Christmas is coming, the goose is getting fat, and feature pages are fast filling up with recycled pieces on how to avoid festive hangovers. Executive summary: drink less alcohol, more water.
Sadly, it’s not advice that Brits are likely to take, even in these slightly straitened times. When money’s a bit tight, it seems, we might put off buying cars or a fancy new bathroom – but we are very unlikely to stop going to the pub or nipping into the off-licence on the way home. That’s the opinion, at any rate, of Ted Tuppen, the buoyant chief executive of Britain’s biggest pub landlord, Enterprise Inns. And if his group’s booming profits are anything to go by, this is a man who knows what he’s talking about (see below).
The fact is that we Britons are more than keen on a tipple – in Europe, only the Finns and the Irish put away more per person. We like alcohol so much that we drink twice as much as our grandparents did 50 years ago – the equivalent of 28 bottles of spirits per person per year – and sales of vodka have surged 40% in five years. So much (the Government says) that alcohol abuse costs the nation £20bn in health, policing and damage to the economy. And so much that (according to a Deloitte survey just out), while we intend to spend 3% less on buying presents this Christmas than last Christmas, we plan to spend a (un)healthy 6% more on socialising.
But why is Britain a nation of drinkers? The answer, according to professor of organisational psychology, Cary Cooper, is a Daily Mail leader writer’s dream double: house prices and family breakdown. Since today’s 20 and 30-somethings can’t afford to buy houses – and are too messed up by their parents’ divorces to invest properly in long-term relationships themselves – they have both the spare cash and the inclination to go on more benders than ever.
Good news then that booze is getting cheaper in real terms – an astonishing 49% more affordable in 2000 than in 1978, say Government figures.
This week, the UK took its love affair with alcohol a step further: new legislation means pubs can now stay open as late as they like, subject to council approval. The politicians say they want to promote a more relaxed, Continental-style drinking culture where we don’t all spill out on to the streets at the same time and fight. The police say we won’t get that. Instead, there will just be more drinking and disorder.
So which will it be? We suspect the latter, but the pub trade can’t afford to look too gleeful over its good fortune, so spokesmen have been busy downplaying the potential boost to profits from longer hours. They point out that only 240 pubs and clubs have so far been granted 24-hour licences.
But the truth is that of the 60,000 pubs in Britain, 50,000 have applied for the right to stay open longer. Why? Because they want more time to sell more drinks. According to a report last year by Goldman Sachs on Mitchells & Butlers, which owns over 2,000 pubs, the big pub groups can expect a boost to revenues of around 10%, based on the (conservative) assumption of an extra five hours drinking spread over a week. For the seven big pub chains that own more than 1,000 pubs (including Enterprise Inns, Punch Taverns and Greene King), that means a lift to revenues of £500m. For all pubs, the figure is an intoxicating £1bn. Cheers.
The three best shares in the sector
Punch Taverns (PUB) has had a busy year, with two acquisitions, two refinancings, two disposals and the refurbishment or redevelopment of 936 pubs, says Robert Cole in The Times. Last year it raised its pre-tax profits by 28% and its cash flow has been strong enough to enable it to lift the total dividend by 26%, while its strategy of cutting poorer pubs and adding good pubs is producing “strong organic growth”. Opening-hour extensions will provide a boost in trading, helping both sales and margins, and best of all the shares trade on a p/e ratio of less than 11. “Buy”.
Rival Enterprise Inns (ETI) looks like a good purchase too. Enterprise, which owns 8,500 pubs, has just announced profits up 32% to £306m, says Philip Aldrick in The Daily Telegraph, so it’s launching a £200m share buyback and upping its dividend by 50%. On a reasonable p/e of 13.5 and a 2.3% prospective yield, investors would do well to hold this “cash machine” in their portfolio.
Finally, shares in SABMiller (SAB) may be worth a look. They have been moving higher since the UK brewing group announced it has acquired the remaining 41.8% it did not already own in the Central American brewer BevCo Ltd. BevCo’s brands include Pilsener, Bahia, Miller Genuine Draft and Coca-Cola. Dresdner Kleinwort Wasserstein says the deal makes “good strategic sense” for SABMiller and will enhance earnings. Dresdner estimates the cost to be around $400m and the return on invested capital at 6.3% – a little on the low side, but the broker reiterated its ‘hold’ rating and 1,100p target price.
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