Get a pint in. Things are looking up for the pub trade.
The sunshine has raised spirits in the industry, with both Greene King and brewing group Fuller’s reporting strong sales as temperatures soar. Throw in a rapidly growing campaign to repeal the smoking ban, and conditions are starting to look brighter for the industry than at any time since MPs voted to ban smoking from all pubs and clubs in 2006.
But lumbered with debt that would put a sub-prime borrower to shame, pub companies do not look like good value for investors. They’re still paying off the tab built up during the boom years – not an ideal weight to be carrying during a recession.
In an effort to expand, pub groups borrowed heavily when credit was cheap, acquiring thousands of boozers up and down the country. The legacy is a horrible amount of debt that would embarrass even the UK’s over-leveraged property companies.
Take Punch Taverns. It has a net debt-to-equity ratio of 3.5 to 1 (as of March 09). That means that Punch owes £3.50 in debt for every pound that shareholders have invested in the company. Segro (LSE: SGRO), one of the biggest holders of industrial property in the country, has a ratio of 1.2 to 1. Not great, but a good deal better than Punch, or for that matter, Enterprise Inns, which boasts a ratio of 2.5 to 1.
It gets worse. Punch recorded operating profits of £240m in the six months to March 09. Of this, £165m went on servicing debt. So 68% of the pub group’s entire profits went to paying off the bank for all the money it borrowed during the boom years. Segro, on the other hand, had profits of £228m, of which £127m, or 55%, went on interest payments.
And because the drop in value on their properties has affected them so badly, the fortunes of companies such as Punch and Enterprise depend more on the price of property than on the number of pints that punters sink. So in turn, buying their shares is little more than a punt on a recovery in the property market. But then, if you have your fingers crossed for that (we don’t), you’d probably be as well off buying a pure-play property company such as Segro.
Of course, if turnover increases, the debt won’t be such a problem. But with up to 50 pubs a week closing in the UK, and sales in long term decline, we wouldn’t bet on a recovery just yet. Which means that sunny weather or no sunny weather, we wouldn’t go near a pub stock any time soon.