Market forces?
We ask which companies will be winners in 2004.
As former Aussie rugby union ace David Campese can testify, trying to pick winners is a sport littered with the debris of tarnished reputations. Most people know the feeling of picking a dead cert only to see it shot in the pre-race paddock. You can't even be certain that Scotland's football team will beat the Faroe Islands these days.
The same applies to business and picking pub sector winners is no easy task. The stock market darlings of a few years ago, such as SFI, are not quite as popular these days and the companies once deemed boring or uninteresting to investors, such as Greene King and W&DB, are now in vogue.
With that in mind, we have found five fearless leisure analysts willing to pick up the gauntlet and stake their reputation against a winning pub player for 2004. The handsome list of contributors we have assembled reads like a who's who of industry experts. These are the guys that make a living from researching and recommending companies on behalf of institutional investors. Here they reveal the companies to watch.
Joining our star-studded panel of analysts we have a couple of hacks. Firstly, Fleet Street's leading leisure correspondent Dominic Walsh of The Times newspaper, and last, and unfortunately least, Mark Stretton of this church.
Disclaimer: The Publican takes no responsibility for how the share prices of these companies perform next year. We will however be happy to provide addresses and home telephone numbers of our panel if things don't work out.
JD Wetherspoon: Business as usual for the 'Spoons
The absence of Tim Martin from JD Wetherspoon for six months on a sabbatical may have given the other senior managers a chance to try something different towards the end of 2003. However, the company has suggested that it has been "business as usual" albeit with a little tinkering around the edges.
In 2004, in line with other pub companies, expect further positioning at JDW in relation to the Licensing Act to be on track for a March 2005 implementation. This means that 2004 should see the bulk of the response to local authority guidelines.
Overall, it is widely believed that licensing reform could be a net positive for the group. It has few late-night licences in England and Wales (40 at Lloyds No1) and while the group may have to contend with some local authorities discriminating against new late licences, it should see an uplift in sales particularly on high days and holidays.
In terms of administration, the group has buildings plans for all of its premises already in existence, and operating schedules should fall out of the brand standards manuals.
JDW is set to open around 35 new pubs in the calendar year and has recently upped its ability to buy back shares for cancellation with any spare cash. Observers can expect further experimentation with TV screens, particularly during Euro 2004, and the new products team at JD Wetherspoon (responsible for breakfasts, Curry Club, coffees, 10am opening and other innovations) will no doubt look to find more ways of getting more customers to spend more money in the group's pubs.
Finally, a word of caution. JDW views a large part of its customer base as people for whom a likely alternative to a pint in their local Wetherspoon, is a drink at home. Supermarket sales of beer in particular is the trend to watch.
Simon Johnson, UBS Investment Research
Ultimate Leisure: The Ultimate late-night king
In an intensely competitive current late-night bar and nightclub scene, Ultimate stands out from its peers on account of its trading record since its flotation in 1999, its strong balance sheet and its excellent prospects.
With the benefit of healthy cash flow from its strong presence in its North East heartland, the strategy has been to expand in a measured fashion into other towns and cities in the UK including, most recently, Belfast. Not only should the four sites acquired there contribute significantly to earnings in the current financial year to June 2004, but they have also laid the foundation for further expansion in Northern Ireland in the short/medium term. Given that competition there is mainly confined to local operators, the quality of Ultimate's offering and its management skills should give it a significant advantage.
The recent placing of new shares with institutional investors which raised £20m, net of expenses, has very significantly strengthened the financial position of the group, giving ample resources for a current financial year investment programme which includes the redevelopment of some existing sites and new openings at Durham, Leeds and Derby.
As importantly, the placing will provide the necessary financial resources to make opportunistic acquisitions of single sites and, conceivably, of a small tranche of units that may become available as financially hard-pressed competitors exit the market.
While the effect of the placing will restrain earnings growth in the 2003/04 financial year, on conservative forecasts we expect a resumption of steady earnings progress from 2004/05 onwards.
But if, as is quite likely, opportunistic acquisitions are made, the anticipated progress should accelerate, thereby consolidating Ultimate's position as the leader in this peer group in respect of trading performance.
Nigel Popham, Teather & Greenwood
Enterprise Inns: Hanging up the M&A hat, so bring on the cash
The stock market is a discounting mechanism. It looks to future earnings and decides what price is worth paying for them now. In March 2004, Enterprise will become the largest pub landlord in the UK, following its exercise of its call option in Unique Pub Company. Who cares? Size isn't everything is it? Well, no, but in the world of leased pub ownership, it is.
Enterprise's EBIT (operating profits before interest and tax) will grow to around £500m in the first full year of Unique Enterprises in 2005. That means that it will make more money than any other stock in the Pan European Leisure sector apart from Accor. Given that Enterprise started off buying Bass's cast offs a decade ago, it generates 69 per cent more profit than Mitchells & Butlers and 29 per cent more than InterContinental Hotels. What this means is that the group will be able to invest in its enlarged estate, pay interest, tax, and dividends, and still have a cash pile left each year to buy in a significant amount of the group's equity or pay a much greater level of dividend.
The business model operated by Enterprise Inns - almost an unbranded franchise system - should be able to generate earnings' growth each year of around 15 to 20 per cent per annum without recourse to any further acquisitions. This growth rate is more than double that of the long-term rate of the UK stock market. We believe that the dividend growth, which is already the best in the sector at around 20 per cent per year, will be re-based upwards in 2006, providing a level of yield support greater than the market.
Our long-term price target is 1470p. Based on a full year's contribution from Unique, this represents a price earnings ratio (P/E) of just 13 times.
The UK market P/E in 2004 according to Deutsche Bank is 13.0x. For the same price you could have Enterprise Inns, growing earnings and dividends at about twice the market's rate.
Geof Collyer, Deutsche Bank
Punch Taverns: Packing a Punch for rapid growth in 2004
