Smaller Companies: City Centre success on the menu

AMID the gloom of the drinks companies' results in the past fortnight there has been one consistent, positive ray of news that casts a favourable light on City Centre Restaurants.

Food has become a main growth line for pubs, beset by dwindling beer sales. Pubs, through restaurant concepts and built-on dining areas, have seen food sales rise to more than 15 per cent of turnover on average.

The market for eating out has experienced a high degree of trading down by customers, ever keen to extract more value for less money. More expensive restaurants have suffered particularly badly in the recession.

City Centre's positioning in the market is indicative of the one adopted by pub groups - branded restaurant concepts targeted at lower spending customers.

An average pounds 4.50 per head is spent at the company's 96 Deep Pan Pizza outlets, pounds 6.50 at its 35 Garfunkels, and pounds 12 at its nine Chiquito's venues, which sell Mexican food.

The company also owns four Filling Stations and a dozen Adam's Ribs and Bigun's Ribs in London, where the average spend per head is pounds 9.

One of the main attractive prospects for City Centre is its exposure to discretionary spending, which should continue to rise if the economic recovery is sustained. And consumers are unlikely to abandon their fondness for value for money.

Cash generation is a strong feature of the group, enabling it to expand without a long burdensome chain of bankers in tow. Free cash flow in 1992 was pounds 10.76m.

By the end of 1992 it had net cash of pounds 11.4m, more than two-and-a-half times the amount it started with in a year that saw it open five restaurants.

There are plans this year to open a further six, and refurbish 30 existing outlets. Despite the associated pounds 7m cost, Panmure Gordon, the broking house, estimates that another pounds 4m of net cash should be generated this year and the balance at the end of 1994 should top pounds 21m.

Taxable profits in 1992 were pounds 11.3m, having dipped from pounds 10.65m to pounds 9.1m in the previous year because of the Gulf war. Similarly, earnings per share were 4.14p, having eased from 4.04p to 3.79p in 1991.

The strength of the performance looks even better against the backdrop of the aggressive competition in fast, and middle-market food.

A balanced geographical spread has been a prime factor backing its growth. It has 69 sites in London, 41 in the South, 12 in the Midlands, 26 in the North, and 10 in Scotland.

Costs have been well contained. Administration costs in 1992 were pounds 3.65m against pounds 3.62m in 1989 when it operated 20 per cent fewer outlets.

Return on capital employed is circa 20 per cent, with each unit turning over an average pounds 570,000 and making gross profits in the region of pounds 90,000.

Analysts expect taxable profits of around pounds 11.3m for this year, and pounds 12.7m for 1994. The shares, down at 58p last September, have climbed more than 40 per cent to 84p, where they sport a premium p/e of 18.4 for this year, falling to 16.5 for 1994.

The shares, despite their premium, do not reflect the possibility of an envious competitor moving in with a takeover bid and the trading prospects if the recovery is sustained.

An encouraging update on trading at City Centre's annual meeting a week on Thursday would further bolster the attractiveness of the shares.