With 35 pubs closing each week, it appears a little crazy to be talking up the leisure sector. However, Brulines, which monitors beer sales in licensed premises, is definitely bucking the trend. That’s because more than 70% of its turnover is recurring – mainly based on fixed-price contracts to record/analyse data from the 22,000 pubs where its kit is installed. That’s equivalent to a market share of 38%.
Brulines’ technology measures volume, temperature, flow rate and the type of liquid dispensed at the pump. It helps clients to maximise sales and service, as well as reducing waste and improving quality – which is a major draw in challenging economic conditions.
What’s more, because Brulines has relationships with all the big pub groups, such as Punch Taverns, Green King and Enterprise Inns, these agreements are typically rolled-over even if a pub changes hands. Furthermore, the slump has made it difficult to generate revenue from one-off installation fees. CEO James Dickson is addressing this problem by offering hire-purchase agreements that see the firm recoup its fitting costs in just one year.
Brulines also has excellent prospects overseas, especially in America and France where its systems are currently being tried out. The company has also branched out into monitoring vending machines, petrol pumps and gaming machines – a move that could easily double the size of the business. Moreover, it is seeking to acquire rival petrol-station IT specialist Universe plc, in which it owns a 11.5% stake.
The City is forecasting 2009/2010 sales and underlying earnings per share of £20.7m and 12.6p respectively, rising to £21.5m and 13.3p a year later. Consequently, the shares trade on mean price earnings (p/e) ratios of 9.2 and 8.7 and pay a healthy 4.5% dividend yield. However, I would value the stock on an eight-times Ebita multiple, which, after adding back the £4m of net cash, gives a fair value of about £1.6 per share.
One possible fly in the ointment is the much-criticised beer-tie between pub tenant and landlord being overturned by the Lib-Con coalition, which could change the way publicans monitor beer flow. But a recent favourable ruling from the Office of Fair Trading should let the industry move forward, and could even lead to a jump in demand as previously delayed orders are released. Preliminary results for the year ended March are out on 9 June.
Recommendation: BUY at 116p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments