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The great pub sector binge

By Simon Nixon


www.breakingviews.com

Like drunken revellers after 12 pints of lager, UK pub sector investors seem to be afraid of nothing. In the past few months, the sector has been threatened with a smoking ban, told it must foot the bill for policing 24-hour drinking and hit with a rise in the minimum wage – all against a backdrop of a potential slowdown in consumer spending and growing competition from cheap booze sold in supermarkets.

Yet investors remain in defiantly high spirits. Since the start of the year, shares in almost of all Britain's quoted pub groups, such as Enterprise Inns, Punch Taverns and Mitchells & Butlers, have hit record highs. The exception is JD Wetherspoon, which has had a difficult year, yet is still trading well above its 12-month low. But is the market letting its excitement get the better of its judgement?

Investors are keen on pubs because they produce huge quantities of cash. This is true of both tenanted and managed pub companies. Tenanted pub companies, such as Enterprise and Punch, make their money from rent and the supply of beer. Managed pub companies, such as Mitchells and JD Wetherspoon, make their money from selling food and drink.

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