The private-equity boom has sent the share prices of many low-growth and quite ordinary companies rocketing well beyond profit expectations. Just look at the pubs sector. This has seen a massive re-rating due to lower perceived risk, attractive property portfolios and hopes that companies will convert to real-estate investment trusts (REITs). These stocks are very fully valued on 20 to 30 times 2007 p/e ratios, even though earnings growth is forecast to be only 10% a year or so. This week's turkey is one example:
Luminar (LMR), rated a BUY by Panmure Gordon
Luminar is the UK's largest nightclub operator, with 122 venues under the Oceana, Liquid and Lava & Ignite brands. Last year, the long, hot summer and the World Cup hurt the group as people drank in pubs rather than clubs. In fact, the whole market struggled amid increased competition, price wars and soaring costs. There were also new licensing laws, a Scottish smoking ban, and a crackdown on binge drinking to contend with.
To its credit, the board's response has been wide-reaching. Less-lucrative sites were sold in December to property group Prestbury for £77m. Luminar now focuses on large venues offering entertainment that pubs cannot match dancing, live music, corporate events and product launches. Plans are being drawn up for the upcoming English smoking ban outdoor areas are being spruced-up and the company has even struck a deal with Ann Summers to sell sex toys inside its cigarette-vending machines. However, there are major challenges ahead, including the need to boost non-weekend traffic, and another hot summer could hit performance again. This is also a notoriously cyclical industry and there are already wider concerns over consumer spending.
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In 2007, underlying sales and earnings per share are expected to be £223m and 39.1p respectively, putting the stock on a pricey p/e ratio of over 20. I would rate the shares on a 15 times multiple, generating a fair value of around 590p, or 35% below current levels. I recommend that shareholders take profits.
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Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
