Promising brew

PORTFOLIO JOHN BULL

Despite pre-publication nerves (following some beautifully wrong Sunday newspaper re- ports), the Monopolies Commission report on beer can cause little distress to the industry's many shareholders. Brewery shares today stand pretty well where they were. All the same, the episode is not without its investment lessons. The most important is the distinction between breweries which have a high proportion of tenanted pubs and those with a high proportion of managed outlets. The latter are much better placed than the former because although the Government might decide to outlaw restrictive agreements between tenants and brewers re- lating to wines, spirits and mineral waters (despite the Monopolies Commission's weak- ness on this point) it could hardly do so for managed houses. Second, size and marketing power should command an increasing invest- ment premium: such companies would do well in any widening of the total retail market (the Commission's answer to the tied house system).

If, therefore, you come to prefer brewery companies with a high proportion of managed premises, then the outstanding unit is Scottish and Newcastle, three quarters of whose premises are managed rather than tenanted. Next best placed on this criterion is Bass Char- ington, with 37 per cent of its outlets managed. Then Allied Breweries (36 per cent). Weakest are Watney Mann (18 per cent) and Courage, Barclay and Simonds (16 per cent). Bass Char- ington and Allied Breweries are the two heavy- weights in the list, however you measure them. Both have over -10,000 licensed premises (Whitbread is number three with just over 8,000) and, as a measure of strength in the wine and spirits markets, Allied has 5.8 per cent of all off-licences in Great Britain.

What, in any case, are the short-term prospects of the brewers? Recent production figures from the industry have been good. Minor price rises and some rounding up of duty increases have helped margins. And some major rationalisation benefits following the big mergers are still coming through. Thus the general expectation is that pre-tax profits stand to rise by about 10 per cent this year. You have to compare this with the current rating of brewery shares—and average dividend yield of 4.2 per cent (compared with an average for the market of 3.6 per cent) and a price earnings ratio of eighteen, which is marginally less than the 500 share average. Thus brewery shares are one of the more attractive sections of the market, but not overwhelmingly so.

Allied Breweries has been in my second, speculative portfolio since 'Unilever first pro- posed a Merger. I had quite a decent profit on the shares. But then the Board of Trade re- ferred the matter to the Monopolies Commis- sion, which has left me all square. It is diffi- cult to guess what conclusion the Monopolies Commission will come to, but I doubt whether the Government will outlaw this merger. Since the reference, the President of the Board of Trade has spoken of the need to get a wide range of assurances from firms proposing to merge—covering matters such as export per- formance and redundancy: The Board of Trade also intends to send merged groups to the Monopolies Commission for examination if, after say a couple of years, it looks as if few benefits have been reaped from the association. With these extra checks and balances I find it hard to believe that either of the two proposals now under study will actually be forbidden. So on these grounds alone there is a good case for keeping Allied Breweries in my speculative portfolio on the chance of another bid from Unileirer.

In any case Allied Breweries is a strong group likely to do well in any free-for-all. It pursues an aggressive marketing policy, put- ting a lot of money behind the promotion of Double Diamond, Skol International and Long Life and behind both Tetleys and Ansells draught beers. In the first seven months of 1968, for instance, the group spent £462,000 on beer advertising. In wine, Allied brands include the Nicolas French table wines, German wines under the Goldener Oktober label and Don Cortez Spanish wines.

Valuations at 30 April 1969 First portfolio

100 Empire Stores at 65s £325 125 Phoenix Assurance at 35s 6d £222 330 Witan at 21s .. • • • • £346 500 E. Scragg at 22s £550 500 Clarkson (Engineers) at 19s 9d f494 60 Rio Tinto Zinc at 140s .. £420 1,000 Associated British Foods at lOs 1}-d .. £506 1,000 Jamaica Public Service at 6s 6d .. 325 133 Electric and Musical Industries at 53s 9d • • • • .. £358 100 Lyons 'A' at 89s 6d .. £447 200 British and Commonwealth Ship- ping at 40s 6d £405 200 Forte's Holdings at 42s .. £420 67 Bowring at 58s £194 1,000 English Calico at 9s 101-d .. £494 Cash in hand .. • • .. £1,484 £6,990 Deduct: expenses £246 Total f6,644

Second portfolio

600 Pillar Holdings at 18s 9d ..

15 Kaiser Steel at £36 12s .. 250 Lonrho at 63s 9d .

100 British Petroleum at 130s 6d 300 Vosper at 23s 3d 1,000 Allied Breweries at 21s .. 300 J. Bibby at 31s 6d 100 Burmah Oil at 108s 6d ..

Cash in hand ..

£5,890

Deduct: expenses £185 Total £5,705

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£563 £549 £797 £652 .. £349 . . £1,050 .. £473 .. £542 .. £915

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