Mind the perception gap

To say the recent slump in the share price of the country's leading listed pub operators has attracted a certain amount of attention would be a case of classic understatement.

The collapse has prompted a number of people, notably critics of the pubco's leased model, to question the health of these behemoths of the industry, with their billions of pounds worth of debt and 'dubious' property valuations.

Indeed, fuelled by interpretations of some of the analysis emanating from the City some are convinced that one or more of the big players will soon cease to exist altogether.

But others see things differently. Some point to the City and argue the Square Mile's analysts - once labelled 21 years ago by the then Chancellor of the Exchequer Nigel Lawson as "teenage scribblers" - are missing the point when it comes to the sector and doing its pubs and their operators an injustice into the bargain.

One industry observer recently wondered, somewhat icily, what value stock-watchers added to the mix. "Given what's happening to investment banks and banking more broadly," he asked, "with the taxpayer having to row to the rescue for eye-watering sums of money, why do we still pay so much attention to their views on the prospects for pub companies?

"At least pub companies are still making money. These 'masters of the universe' still have the front to make 'informed' comments about pub companies' business models and strategy, while their decisions have plunged their own companies into near bankruptcy and the global economy into recession and the only reason they are still in a position to comment is they are being featherbedded by piles of taxpayer cash." Strong stuff.

It's not just analysts who come in for a slap either, with one sector finance expert arguing that banks which lent against hypothetical property companies were now seeing their folly.

"The whole opco/propco fiasco was ridiculous," he says. "I said it at the time and it has proved to be the case - financial engineering does not make a pub generate any more cash, so how can it pay the higher levels of interest? As it turns out, it can't."

Perception gap

But the view that a perception gap exists between the City and the industry is not a new one.

I recall speaking with the chief executive of a large regional brewer three years ago who aired more or less the same point. His argument, echoed since, was a simple one. "We can only focus on doing the best we can for our business and concentrate on day-to-day operations," he said.

"The market goes from one extreme to another, like the debate over what is better, the tenanted and leased model or the managed house operation. At the end of the day we know our business better than the City does."

For some observers the City has been blind to what is going on in the industry at a grass roots - perhaps that should be 'cellar' - level and it needs to get out more. Literally. One well-informed former pubco executive says City types need to broaden their awareness of the industry.

"Many analysts just don't have enough knowledge of the pub industry or what's going on within it in order to make the sort of investment recommendations they come up with," he says. "If they don't understand the intricacies of the sector - and there are some who clearly don't - then how can they properly judge companies working within it?"

Analysts naturally counter this view, but some accept that getting their 'hands dirty' when time permits is a useful exercise.

Some older City hands say analysts today are sitting at their desks too long, immersed in earnings spreadsheets ,when they should be out and about in the industry.

"In the late 1980s and early 1990s no-one had a computer, or was bonused on a quarterly basis," says one experienced pub sector watcher. "Analysts 20 or so years ago got under the skin of a company, worked out its fair value and bought into it." Simpler times then.

Another difference today is the level of financial disclosure available, he argues: "Two decades ago data was less accessible. People did more work to find out about how the business they were weighing up worked.

"Before the Beer Orders the numbers were largely irrelevant; it was how the business operated in the bigger picture that made the difference. Now there is more to take on board."

Market defence

There are those quick to defend the market, pointing out that the City's raison d'être is after all to provide its clients - whether monolithic pension funds or private individuals - with investment advice and thus take a longer term view.

Says one observer: "The questions being posed by analysts are along the lines of 'are things going to get better or worse, and when?' And 'is this the right time to invest in a pubco?'

"Yes, the stock market overdoes things from time to time. For example, no-one batted an eyelid when shares in Punch Taverns and Enterprise Inns were circa £15. So why should they bat one now they are 40p?

"The market occasionally goes to extremes, while the fundamentals of the businesses, such as their trading and their ability to service their debt - which is actually key, rather than how much their debt actually is - are more or less the same at either end of the pricing scale. Having said that, generally the market rarely gets things completely wrong."

So what do other Big Cheeses make of the situation? Having seen the value of his company's stock plummet during the last year, Ted Tuppen, chief executive of Enterprise Inns, is somewhat sanguine when discussing the merits of the City's analytical output.

"The City's concerns revolve around property valuations, debt and trading, which are all perfectly reasonable things to consider," says Tuppen. "However the quality of some of the analysis may lead to some worrying conclusions. The City is certainly more worried about the health of Enterprise Inns than I am."

Worried indeed. The City, as with other areas of the economy, is under pressure as never before. Jobs are being lost in the Square Mile just as they are in manufacturing and high street retailing. Towards the end of last year one bank, JP Morgan, took such a dim view of the prospects of the UK's hotel and pub sectors it canned the London research department that covered them, with the loss of dozens of jobs.

While good analysis of a pub company is like any other piece of quality-driven research, such pressure - real or perceived - can be a distraction. As one analyst said last week: "There has been a certain degree of 'number blindness' in recent times, which adds to the pressure and takes people away from the inherent issues.

"Yes, some pub companies are struggling, but they aren't struggling nearly as much as their share prices would suggest."