Fool's Eye View

[ June 15, 2000 ]

Yates Brothers -- Full-Year Results

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- This morning Yates Brothers (LSE: YBW) reported another year of growth in both turnover and profitability. Pre-tax profit before exceptional items for the year to April 2 was £15.6m, up from £14.1m on sales of £144m (up 20%); earnings per share was up 8% to 21.2p. The profits have been reduced quite substantially due to the adoption of the accounting standard FRS15 (Tangible Fixed Assets), which has changed the way properties are depreciated in a company's balance sheet. Without the adoption of FRS15 earnings would have increased by 18%.

Shareholders in Yates Brothers Wine Lodges (to give the company's full name, soon to be changed to just Yates Group), a "themed bar" operator, have had a pretty torrid roller coaster of a ride over the last five years. Just have a look at this chart; in 1997 the shares were priced at 281p, and this increased rapidly, hitting a peak in 1998 of 559p, shareholders would have been rejoicing! A bottom of 209p was reached in the same year, before shooting up to 513p in the middle of 1999 to be followed by a continuous fall to 235p this morning.

If you just followed the share price you would imagine that the Yates business must have had a very volatile couple of years, profits up, then down, then up, then down again. But this could hardly be further from the truth. Over the last five years they have shown steady compound growth in earnings per share of 27%, and yet the share price today is below the share price at the start of 1997. The difference is that in 1997 the shares traded on a price to earnings (P/E) ratio of 43; they now trade on a multiple of just 11, and this shows the risk of buying growth companies on high earnings multiples; even if they manage to deliver the growth they may not manage to hang on to the high P/E ratios of the past.

During the last year during the year, 31 new branches were opened, 25 of which were Yates's Wine Lodges. The company is continuing to expand away from its northern strongholds, and now generates about 42% of its sales in the South. It now operates four different themes: Yates Wine Lodges, Ha! Ha! Bar & Canteens, Watling Street Inns and the Blob Shops.

The recent White Paper on licensing reform has had a somewhat dampening effect on interest in this sector, but Peter Dixon the chairman said that this "paves the way for the removal of outdated and unnecessary operating restrictions as well as the much-needed simplification of the licensing system itself." He said that if it is enacted in its current form, "we believe we are well placed to benefit from a more enlightened approach. The late evening operating format of Yates's Wine Lodges is ideal for the new environment, being equipped to provide customers with lively entertainment, competitive prices and free admission."

With the share price now trading on a lowly P/E ratio of just 11 and earnings per share forecast to grow by 18% in the current year the company now looks much more attractive to investors than it was in the middle of 1999. It seems unlikely that their growth will falter, at least in the near term, and with a Fool Ratio (the growth rate divided by the current P/E ratio) of just 0.6 they are beginning to look increasingly attractive. Give us your thoughts on the Yates discussion board.

Related Links

• Sector Dissector on the Pubs & Restarants sector
• Yates Brothers discussion board | website