Stock to Watch: Young & Co's Brewery

With AIM-listed shares in Young and Co's Brewery trading back near their 2012 market low of 600p, having fallen from near 700p, it is interesting to note a strong annual general meeting trading statement from this pubs estate manager - benefiting from investment in new pubs, the addition of three sites transferred from tenancy, and strong trading during the Diamond Jubilee celebrations.

After the first seven weeks of the financial year (from 3 April) were affected by poor weather, more recently trading has improved such that managed house revenue for the first 13 weeks was up 10.1% and up 4.0% on a like-for-like basis.

The final six weeks of the period therefore saw particularly strong trading, although I speculate that poor summer weather - with Britons also escaping to sunnier climes - could mean another down-dip in revenues. Since Young's is ultimately backed by asset values over 70% higher than its current share price, this could provide another useful entry point for investors. Sentiment may have been affected by a recent placing at 550p a share, which new investors judged as appropriate value to get involved.

Yet the long-term chart is relatively friendly with a reasonable up-trend since nearly halving to 380p in the 2008 financial crisis. A sense of a strongly-branded operation with asset backing may be succeeding in attracting investors, especially when the shares get hit by wider market falls - and currently, the worry how prolonged wet weather is affecting summer pub revenues.

On earnings and dividend criteria, Young hardly screams 'buy'. Company REFS shows three analysts looking for a consensus £23.0 million pre-tax profit this current financial year, rising to £25.5 million in 2013/14, for implied earnings per share of 35.5p advancing to about 40.0p.

So the forward price-earnings (P/E) is already quite demanding at 17 falling to 15, assuming these forecasts, versus underlying growth of 8% to 12%. While still respectable progress, especially in currently challenged times, on an earnings basis it looks (more than?) fully priced in. This helps explain why the shares have drifted from nearly a pound higher, as bad weather affected sentiment.

Likewise dividend valuation is hardly enticing. About 5% annual growth is forecast for the next two years, an improvement on about 2% in two recent years, and with respectable cover of about 2.5 times relative to earnings. Even so the implied yield is only just over 2%, which is neither useful in itself nor any support for the shares. Plenty better exists elsewhere.

It's worth dwelling on these angles of value, because even if there is substantial asset backing, unless the group is broken up (highly unlikely) the focus should be on what the assets can earn - rather than what they could fetch in a sale.

Even so, Panmure Gordon is one of three brokers covering, all with 'buy' recommendations. This analyst is targeting over 800p a share - implying over 30% upside. The analyst's valuation assumes earnings per share will grow at 9.8% annually (compounded) for the next three years, extending a year further than other forecasts, and which compares with an estimated 6.2% for Fuller Smith and Turner while its P/E multiple is also in the mid-teens.

I tend to be wary of relative valuations, because if the entire sector is fully priced or could be heading for trouble, this approach is risky. But the pubs sector should continue to offer some defensive appeal because its significant improvement in food - to "gastropubs" - should capture business from pricier restaurants. The smoking ban has also introduced a new clientele who previously avoided pubs.

So to Young's ultra-strong asset-backing. Net tangible assets per share have nearly doubled well over £10 million in the last financial year, mainly because property and equipment have risen from £320 million to £502 million. The estate was revalued last autumn at £497 million, a large net uplift of £174 million, although simultaneously there was a £29 million charge to the income statement where they have fallen - this is why it shows a £7.5 million pre-tax loss and a "normalised" view is required.

In mid-June, Guinness Peat Group, the listed investment group, placed its 15.4% stake in the A ordinary shares and its 34.2% stake in the non-voting ordinaries, with various institutional and other investors. At first sight this may look worrisome but came in context of GPG's ongoing policy of realising its portfolio of investments.

So it is some encouragement that a spread of investors has sought exposure to this business currently, albeit at an implied discount to market price. Three directors simultaneously bought shares at 550p, which implicitly was the placing price (not cited in the placing announcement).

Young's orientation towards London and the south east, also the premium end of the market, appears to be helping. Management says it is well prepared for the London Olympics, anticipating a busy period for various pubs and hotels, where bookings are very strong. "We remain confident that our premium strategy, well-invested estate and management focus on growth should continue to drive superior like-for-like performance."

According to last year's diary, there may not be another trading update until the 24 November interims, although if the sector starts to issue profit warnings from the wet weather and recession then possibly Young's will be prompted into a pre-close update in October.

So in conclusion, although aspects of Young's profile don't look compelling, I would have the shares on the summer watch list while the sector could be temporarily affected by the weather, also if markets panic over the eurozone or US economy. Given its solid credentials in property and brands, this is the kind of share to tuck away when marked down.

For more information see youngs.co.uk and for more Stocks to Watch, visit Edmond's archive.