Most brewing shares look too expensive or have too much debt.
After recent results from several of Britain's purveyors of alcoholic beverages, the reporting season for breweries continued this week.
Greene King, producer of the excellent but amnesia-inducing Abbot Ale, reported interim results on Tuesday, and though things looked pretty flat overall, they showed a healthy performance in what was a hard six months.
Revenue was up a little, at £465m (+4.3%), with like-for-like sales in the managed pubs division growing by a healthy 4.6%. Pre-tax profit rose a more modest 2.8% to £62.4m. Due to a 3 for 5 rights issue in May, earnings per share fell 17% to 22.6p.
The interim dividend is unchanged at 5.9p per share.
Reducing debt
A highlight of the accounts that pleases me, in these debt-laden days, is that the company put its positive cash flow to good use in paying down some of its debt, reducing the total by £211m. However, the latest debt figure of £1.34bn, is still extremely high for a company with a market capitalisation of only £900m.
Less than a third of the cash raised by the rights issue has been spent, and the company is planning to buy a number of new pubs during the second half.
Full-year forecasts suggest a forward P/E for March 2010 of around 9 and a dividend yield of about 5%, and I'd be surprised if the half-time figures lead to any great re-evaluation of that.
Falling profits
Marston's, which reported full-year results on Thursday (and whose Pedigree bitter is no less worthy of note than Abbot Ale), has had a tougher time of things this year, with pre-tax profits tumbling 17% to £70m. Revenue that was down 3%, to £645m.
The company did say, however, that it has started to see a bit of a turnaround, with sales starting to recover in October and November.
Earnings per share fell considerably, from 16.2p last year to 3.9p, but a large part of that was due to July's £176m rights issue -- the plan is to use some of that new cash to open 15 new pubs in 2010.
Net debt stood at £1.1bn at the year-end, which is down £169m from the same stage last year, although that was largely thanks to the rights issue. Although the debt figure is moving in the right direction, it's still huge when compared to the company's market capitalisation of £500m.
The full-year dividend stands at 7.1p, down from 9.5p last year, representing a 25% fall. These figures are pretty much in line with forecasts, although the dividend is a little lower than the expected figure of 7.3p.
Analysts have earnings per share of 10p pencilled in for next year, and a dividend of 5.9p, though if the reported turnaround in trading over the past couple of months continues, those may well be upgraded slightly in the near future. But on those figures, a forward P/E of just over 9 and a dividend yield of 6% would be on the cards.
Buy the shares?
So what are these companies like as investment candidates? The following table shows the five brewing companies that I have recently discussed, comparing their P/E ratios and dividend yields, and includes net debt expressed as a percentage of market capitalisation.
As you might imagine, I see their enormous debt levels as serious obstacles in the way of investing in either Greene King or Marston.
It might be argued that a company that has very large assets in the way of commercial properties, and whose debt is largely secured on them, should be more suited to running in a debt-financed way. And such gearing will work to gear up profits during good times, the fact that both of these companies has had to go to shareholders to raise more funds this year suggests to me that they have both been cutting it too fine.
Too risky for me
The other three in the table are in much better shape, debt-wise, but their share prices already reflect that, and I just can't see brewers with P/E ratios of 16 to 19 as being any great bargains either.
If you think there's going to be some strengthening in the pubs sector over the next year or two, possibly coupled with rising prices for commercial properties, then the companies here might look a good bit healthier this time next year. But for me, they're too much of a gamble, and my money is staying elsewhere.
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