The Investment Column: Holiday parks pull S&N down

UNTIL TWO years ago, Scottish & Newcastle, the brewer, landlord and holiday camp operator, outperformed the stock market. But since then, tough competition from European brewers, combined with S&N's hefty investment in Center Parcs, has turned sentiment against the group. S&N delivered more bad news on both Center Parcs and the take-home beer markets yesterday, but the shares tipped upwards. Has S&N been oversold?

S&N's challenge is to achieve decent returns from its holiday division, which also includes Pontin's. S&N's cost of capital is estimated at around 9.5 per cent. Overall, it achieves returns on capital of around 11 per cent. Stripping out the leisure division, that figure hits the mid-teens. The City believes S&N overpaid for Center Parcs in the first place - since the acquisition it has invested heavily. The total cost of the venture so far is around pounds 1.2bn. The reward last year was a 2 per cent fall in Center Parc operating profits to pounds 59.4m - just 15 per cent of the total - and a pounds 4.8m operating loss at Pontin's.

S&N is unperturbed by the problems, praising itself for maintaining occupancy levels in the face of disruptive refurbishment on the Continent, costing pounds 98m, and bad weather in the UK. If S&N is to make a success of its investment it will have to pull in more and higher spending punters.

Meanwhile, the group's brewing activities are experiencing mixed fortunes. Sales of its brands through pubs fell, while take-home sales rose. The overall picture was gloomier, with sales down, but only half as much as the market's 3 per cent decline in volumes. S&N's brands, such as Fosters, Miller, Kronenbourg and John Smith's helped it raise its market share.

Even so, market prices fell amid strong competition from Europe. The arrival of Wal-Mart will not improve the situation.

S&N's real strength is as a landlord. Its Chef & Brewer and John Barras brands helped deliver double-digit profits growth this year. Less than half the 2,500-strong estate is branded, so there's more to go for. S&N suffered from a weak summer last year, but says an upturn in the fourth quarter is continuing.

Analysts expect pre-tax profits of pounds 424m to pounds 436m and earnings of 51.6p to 53.7p per share this year, putting the group on a p/e of 13. That looks cheap given the strength of the group's brewing and restaurant brands. But S&N is unlikely to find favour with the market until it delivers better news on Center Parcs. Worth holding.