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Whatever the season, and whatever the state of the economy, there is one area of the market that always seems to turn a profit – pubs and bars. The reasons for this are many and varied, although all probably spring from the great British public's desire to drink when the purse strings are tight, and drink when budgets bulge.

It is therefore no surprise that the smaller end of this market is packed with an endless stream of budding entrepreneurs forever willing to try their luck. For investors this is good news, as Old Mutual analyst Greg Feehely points out, 'there are significant rating variations out there, with many company's valuations not reflecting their underlying earnings. The reality is that all are trading well'.

Mixed operators

A selection of the current batch offer a cocktail of different outlets within their portfolio. One is Chorion (bars, clubs and restaurants), which trades on a forward p/e of just 12.3, and also, unusually, sports an intellectual property arm.

Regents Inns also offers a diverse range of activities, with the massive, Aussie-themed Walkabout sports bars complemented by the Bar Risa/Jongleurs comedy chain plus a more prosaic chain of unbranded pubs.

Much smaller, Aim-listed Old Monk offers a similar combination, with a pub and pub-restaurant estate plus a chain of eight 'Springbok' sports bars (see p. 48).

Fuller, Smith and Turner is more typical of the mixed operations prevalent in the sector, incorporating a high-rolling brewing division and a hotels operation. The company's recent performance has been mixed, with figures for the six months to 29 September showing an 11 per cent decline in pre-tax profit to £6.4 million. Full-year figures are expected to show pre-tax profits of £14 million to £15 million.

The main attraction of Fullers is perhaps its net asset backing, which the management emphasises is significantly higher than the last reported £151 million. This compares to a market capitalisation of £78.3 million, giving the shares a value look to them even after autumn share price rises.

Pubs and brewers

Asset backing is also one of the attractions of the more traditional operators, which combine 'tied-pub' chains with traditional brewery operations.

Two classic examples are Belhaven Brewery and Burtonwood Brewery, both fully-listed, trading at under ten times earnings and offering dividend yields of 3 to 4 per cent. Scottish-based Belhaven offers an excellent historic and prospective record of earnings growth but the shares have had an excellent run of late so are 'not ridiculously undervalued any more', according to Teather & Greenwood analyst Nigel Popham.

Cheshire-based Burtonwood has also rewarded shareholders despite its lower profile, but has been growing at a much lesser rate. However, it does trade at a whopping 47 per cent discount to its assets and has a nice yield of 4 per cent.

An even more simple entity is aptly-named Pubs 'N' Bars, a solid pub operation trading at around nine times prospective earnings, and with an excellent record of growth behind it since coming to Aim in 1999.

Taking over?

Anyone who imbibes regularly in a British town centre on a Saturday night will know that the traditional pub has taken a back seat recently to a more glossy and brash (and expensive) type of bar, offering a somewhat different drinking experience to their young clienteles.

SFI, which runs the Bar Med, Litten Tree and Slug & Lettuce chains, is widely favoured amongst analysts, attracting 'strong buy' ratings from Popham and Peel Hunt analyst Paul Hickman, but the shares have remained stubbornly depressed of late due to wider City scepticism. Recent interim results showed pre-tax profits up 22 per cent at £9.3 million and the new management is taking steps to reduce debt. Popham himself reckons Newcastle-centred club and bar operator Ultimate Leisure and vodka bar pioneer Inventive Leisure deserve further support despite strong share price performances.

Po Na Na runs the underground bar/clubs of the same name plus the Fez chain, some larger clubs and the giant Hammersmith Palais. Teething problems have dogged the latter two operations, though a lot of attention has been devoted to Hammersmith to turn it around, with some success.