Luminar a buy on assets and a bid

Restaurants and night clubs operator Luminar saw the fun and frolic go out of its share price some months ago. But the investment case for the shares is now looking compelling: net assets at the last count were £492 million, which compares with a market value of £221.8 million, the company is throwing off cash and there has been recent speculation that a bid may be on the way.

Headquartered in Luton, Luminar is the group behind the world famous Hippodrome and Camden Palace venues as well as the Chicago Rock Cafe and Jumpin' Jaks chains. It also owns clubs targeted at the younger dance music crowd such as Diva, Ikon and Liquid.

However, the business has been hit by tough competition, heavy discounting on the high street and higher rents. Its recent trading update bemoaned the fact that the anticipated upturn over Christmas 'was not sustained', especially across a number of Luminar's already under- performing units.

During the 44 weeks to 5 January, like-for-like sales were up 1.7 per cent, though total sales were up 13 per cent. In the crucial five weeks to 5 January, like-for-like sales were 4.2 per cent lower.

In response to all of this, analysts have taken their red pens to profit forecasts for both 2003 and 2004. Teather & Greenwood slashed its 2003 earnings estimates by 19 per cent and knocked 23 per cent off its 2004 estimates.

Luminar's principal problem has been falling footfall at its older clubs, made worse by weaker consumer spend and high street discounting. The fag end of the Northern Leisure estate — bought for £367 million last year to make Luminar the largest UK player in this space — has also been a drag on profits.

But changes are afoot. Stephen Thomas, the chief executive, says underperforming clubs are being targeted for refurbishment while the troublesome Northern Leisure clubs are also being addressed. Cash is also being conserved: capital expenditure for the next financial year will be trimmed from £75 million to £55 million.

Thomas remains adamant that Luminar will return to favour. 'We are the strongest business in our sector with very competitive products and an experienced management team,' he stresses.

He also points out that Luminar has a strong balance sheet and powerful cash flow. 'We're well placed to withstand these short-term market pressures, will emerge as a stronger business and will benefit from the recovery when it materialises.'

In the year to March 3, 2002, Luminar lifted pre-tax profits to £56.7 million from £36.7 million. For the year just ending, analyst Nigel Popham at Teather & Greenwood predicts a £65 million profit.

At 303.5p, the shares sell for 5.3 times forecast earnings, and under five times the forecast for 2004. This year's forecast dividend of 10.9p produces a yield of 3.59 per cent. That would rise to 3.95 per cent on next year's anticipated payout.

Luminar

GCI Recommendation

Strong Buy