The Investment Column: Regional brewers replenish profits

The performance of regional brewers over the past five years must have left shareholders crying into their pints. The four largest regional brewers, Marston Thompson and Evershed, Wolverhampton and Dudley, Greene King and Vaux, have all underperformed the stock market by a least a third.

The reasons are easy to understand. Brewing has become consolidated in fewer and fewer hands. A series of takeovers and mergers has left the four biggest brewers controlling more than 80 per cent of the market. But the beer market is in decline. The larger players have responded by cutting prices, squeezing the regionals in the process.

If that was not bad enough, demand for cask ales, the staple fare of the local brewer, has fallen sharply in recent years. Cask ale volumes slumped 12 per cent last year. They are being replaced by new, smooth, creamy nitrokeg beers.

But this market is already dominated by leading brands such as Caffrey's and John Smith's. The regional brands have tried to compete by introducing their own brands, but their efforts have met with mixed results.

While the market has focused on flat beer profits, the real engine for growth will come from the brewers' burgeoning pub estates. Admittedly, the regionals were slow to tap into the explosive growth of the so-called theme pubs which are replacing the traditional British boozer. But they are fast catching up with the main brewers. Greene King, which recently bought the Magic Pub chain, and Marston's, the new owner of the Pitcher and Piano outlets, are rolling out new brands with a passion. Others are following suit. The regional brewers are also pumping more cash into their long-neglected tenanted pub estates.

This pub investment is typically yielding returns of over 20 per cent. And the demand for new venues shows no signs of slowing. A strong economy and the growing trend for punters to eat pub grub while supping a pint should continue to bolster regional brewers' earnings.

Marston's is a case in point. Managing director David Gordon admits he paid a hefty price for the Pitcher and Piano chain last year, but the aim was to acquire a pub concept that could be rolled out across the country. Profits rose 8 per cent to pounds 29.5m for the year to March and Panmure Gordon forecasts the expansion of the Pitcher and Piano brand should push current- year profits up to pounds 34m, putting the shares on 10 times earnings.

Some of titchy brewers with poor pub estates, such as Gibbs Mew, which recently announced disappointing results, will probably continue to struggle. But most of the larger regionals typically trade at a discount of at least 25 per cent to the market. They deserve a re-rating.