Analysts Teather & Greenwood urge caution on sector following First profits warning from chain-pub JD Wetherspoon since listing in 1992
Investors should be wary of a number of enterprise investment schemes (EIS) related to pubs, according to Gurmeet Kalra, a tax and investment expert at Teather & Greenwood.
Kalra, portfolio manager of the group's four-year-old Tax Efficient Growth Portfolios EIS, which diversifies clients' money across 10 schemes, said a recent profits warning from JD Wetherspoon, its first since listing in 1992, should serve as a caution for investors in small, pub-based firms.
Although T&G's EIS portfolio service, with about £20m under management, has invested in pub firms in the past, Kara advised against doing this at present.
'The sector has Wetherspoon giving out warnings and Whitbread trying to offload its pubs so you have to wonder whether it is the right time to be buying pubs,' he said.
There are several EISs on offer at the moment with profitability linked to that of the sector. Tomahawk is one such scheme, seeking to buy and develop pubs within the M25. Another is the Capital Pub Company, which aims to purchase and develop London pubs.
Kalra noted, however, that Wolverhampton & Dudley, one of the more successful listed pub firms, focuses on business outside London and the Southeast.
Elsewhere in the sector, EIS-qualifying Utopia Inns is targeting individual bars in anticipation of the decreasing popularity of chain pubs such as the Slug & Lettuce and Pitcher & Piano franchises.
Among EIS-qualifying companies, Kalra prefers Ofex-listed national security firm FSG Security, valued at about £3.4m. In August 2002, the company acquired competitor Sword Security in a sector awaiting tighter government regulation.
'Government regulation starting in March will mean all manned guard companies will have to obtain a licence to trade so a lot of so-called 'cowboy' operators will either fold or have to go through registration costs,' Kalra explained. 'FSG has already obtained a licence to trade.'
Another industry whose fate could hinge on regulation, in this case far looser regulation, is the pharmacy industry. The Independent Pharmacy Care Centres EIS is involved in buying high street outlets.
'There have been rumours about the Office of Fair Trading looking to deregulate this industry and if it goes ahead we will see a lot of high street pharmacies in trouble,' Kalra said.
For firms to qualify for EIS status, they must be unquoted and meet industry and size criteria. Although dividends from EISs are not tax-free, investors enjoy some sizeable tax benefits. Exit from EIS investments normally comes via trade sale or flotation.
By getting 20% income tax relief on investments and deferral of tax on capital gains, or relief on losses, worth up to 40%, EIS investors re-investing profits from asset sales may still 'only be wagering 40% of their own money in the EIS company,' according to Kalra.
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