Pubs' performance perking up, says Merrill Lynch

There are signs the worst may be over for the UK's tenanted pub sector, according to research published by a leading City broker.

In a note published last week Merrill Lynch, a US-owned investment house, said the outlook for the industry was brighter in 2010, "with trade recovering, debt at manageable levels, regulatory concerns back to historical levels and property values having bottomed out".

Trading across the tenanted sector was improving as operators churned their estates, the broker said, adding the underlying trend was getting better, with top-end pubs showing "greater resilience".

For managed operators, the coming months would offer a "window of opportunity to expand at a lower cost than in the past", Merrill's said.

The World Cup would provide what Merrills called "a small boost" to trade this year.

The broker put out 'buy' recommendations on Enterprise Inns, Punch Taverns, Marston's and Greene King, and said it remained 'neutral' on JD Wetherspoon and Mitchells & Butlers (M&B).

Merrill's research came after it hosted a seminar in the Square Mile on the state of play in the pub trade. A number of senior pub industry executives spoke at the event, including Enterprise Inns' chief executive Ted Tuppen, Punch Taverns boss Giles Thorley, M&B finance chief Jeremy Townsend, Marston's finance director Andrew Andrea and JD Wetherspoon's numbers man Keith Down.

One of Merrill's key assumptions following the seminar was that JD Wetherspoon, M&B and Enterprise might start paying dividends again next year after a lengthy hiatus.

However such a move would be dependent on the businesses successfully refinancing their operations, an outcome that has divided City analysts.

Merrill's research, especially its comments on dividends, encouraged investors to pile into a number of stocks sending share prices sharply up, although some analysts remained unconvinced by the bullish sentiment, pointing to a downgrade of Enterprise Inn's credit rating by Standard & Poors (S&P), the credit rating agency. Shares that had risen yesterday had edged back in this morning's trading session.

S&P said its downgrade reflected its view of the increase in Enterprise's leverage in the past financial year, along with tough trading conditions in which it operated.

But S&P added its outlook for the group remained 'stable', reflecting Enterprise's disposal programme and signs that performance in its better pubs was improving.

Meanwhile another City broker, Charles Stanley, argued that returns for investors could improve through "a combination of emphasis on remedial work on the worst performing tenant/leased sites and an uncompromising drive to hire the best available licensees".