Snooze outweighs booze at Vaux; The Investment Column

Sir Paul Nicholson must wonder what he has to do to satisfy the City. The patrician chairman of Vaux would never show it, but he is understandably irritated by the persistent view in the soft South that the company is nothing more than a regional brewer supplying a tired chain of tenanted pubs in a depressed area of the country. Record profits in the 12 months to September were rewarded by a 5p fall in the share price to 252.5p, a discount even to net assets.

Those results saw pre-tax profits rise 9 per cent to a best-ever pounds 34.8m (pounds 31.8m), earnings per share were also the best the group has achieved at 19.35p and the dividend, which has grown every year since 1969, edged ahead from 10.2p to 10.6p.

As with all misleading perceptions, the prevailing view of Vaux, however, has a grain of truth at its centre. The area around the company's Sunderland base has suffered enormous de-industrialisation and its 749 tenancies include a long tail of dingy boozers in areas no pub chain would choose now. The transfer of a senior manager from the 163-strong managed pub chain to tenancies is a tacit admission that the company has been slow to churn the bottom end of the estate.

As a result, profits from tenancies, still a significant contributor to the group total, fell 12 per cent to pounds 12.9m, taking the shine off a good performance from managed outlets, up 17 per cent to pounds 9m, and brewing, where returns rose 27 per cent to pounds 4.5m despite another forced widening of discounts to both tenants and free trade landlords. Brewing has benefited from cost-cutting and plainly has a future as a niche player in an increasingly consolidating market.

Beer is only half the picture at Vaux, however, a fact sometimes overlooked by investors. The snooze side of the equation is arguably much more attractive than the booze, with the Swallow Hotels chain consistently winning plaudits for the quality of its 30 mainly four-star sites. Profits in the year rose pounds 4.3m to pounds 24.1m, after occupancy levels increased from 68 to 72 per cent.

The hotel cycle should have a way to run yet and two new hotels in Liverpool and Huntingdon should keep the momentum going. Sir Paul maintains that the costs involved would not be justified by the benefits in rating terms of demerging the two sides of the group, but it is an issue that management will have to keep under consideration if the shares continue to languish.

On the basis of forecast profits of pounds 37.3m, the shares trade on a prospective price/earnings ratio of 12, and offer a yield of 5.5 per cent. Against a backcloth of such slow growth, neither ratio makes the shares look particularly attractive compared with rivals Greene King and Wolverhampton & Dudley.