The Investment Column: Good cheer from W&D

AFTER a poor year in 1997 when Wolverhampton & Dudley rather shot itself in the foot by making some misguided investments, the country's biggest regional brewer appears to be showing the green shoots of recovery.

Pre-tax profits for the six months to March rose a respectable 8 per cent to pounds 20.3m. Brewing trading profits jumped almost 47 per cent to pounds 5m, thanks to the introduction of new lagers such as Heineken and Fosters in its pubs and a tight control on costs. Its community pubs are also performing surprisingly well in the face of stiff competition from the major branded chains. And sales at its retail estate have started to move in the right direction again with like-for-like turnover up 2.8 per cent. Sensibly it has chosen to cut investment in its managed pub estate to concentrate on more successful brands such as Varsity and Poacher's Pocket.

But this recovery could turn out to be short lived. W&D admitted as much when it warned that the intense competition in the pub market shows no signs of letting up. To make matters worse the Midlands, the group's traditional heartland, and the North-east, where is also has a strong presence, have been particularly badly hit by the slump in manufacturing impact caused by the strength of the pound.

W&D is probably better placed than many regional brewers, with its brands like Banks' bitter enjoying a market stronghold in its trading areas. Whether the group can effectively compete with the huge amounts of money the nationals are pouring behind their leading brands and themed pub chains is another question. Perhaps the only answer is for the regionals to think about clubbing together to take on the likes of Bass and Scottish & Newcastle.

Panmure Gordon points out that much of W&D's rise in earnings is due to financial engineering rather than real organic growth, with the figures flattered by a recent share buy-back and a delay in pounds 1m of marketing and refurbishment spend until the second half of the year. The broker forecasts full-year profits of pounds 45m, putting the shares on a prospective PE ratio of 10. High enough.