Astute work at Greenalls

The Investment Column

Greenalls has been one of the stock market's brightest success stories thus far in the 1990s. From sleepy family-run brewer, with an antediluvian share structure to boot, the company has taken just five years to become one of the country's leading leisure businesses, a dominant pub owner and a member (just) of the FT-SE 100.

Like Whitbread, it read the runes astutely in the wake of the 1989 beer orders and realised that the future of beer lay in how it was marketed not brewed, retailed not manufactured. That judgement informed the acquisitions of Devenish in 1993 and Boddingtons last year, two companies that had come to the same conclusion themselves.

Half-year figures to the end of March confirmed that the second, and larger, of those deals is bedding in nicely. Pre-tax profits of pounds 79.6m, 41 per cent ahead, received a big kick from Boddingtons, but the underlying picture, showing profits 11 per cent higher, remains encouraging.

Reassuringly, the deal failed to dent earnings per share, which ended the half 10 per cent better at 16p, and the dividend was increased by 8 per cent to 6.22p.

Why the shares should have fallen yesterday, by 20.5p to 590.5p, is therefore something of a mystery, although after Greenalls' strong run over the past 18 months, during which it has outperformed the market by 16 per cent and entered the top flight, a pause for breather was to be expected.

Despite unquestioned success in managing pubs, pushing beer sales through an attractive, higher-margin food offering, and making a decent fist of tenanted outlets, the market keeps finding things to worry about.

Profit growth in managed inns, at 7 per cent last year, was less than even the troubled Allied Domecq claimed earlier this week, and there is nagging doubt that Greenalls is rather better at spending cash than generating it.

Arguably, however, those concerns are factored into Greenalls' share price, which, on the basis of forecast profits this year of pounds 150m, trades on a price-earnings ratio of 15. That is one of the few opportunities in this sector to invest at anything like a market rating and is reasonable value.