Richard Watts, manager of IC Top 100 Fund Old Mutual UK Mid Cap Fund (GB00B1XG7999), says that contrarian investors should look to Spirit Pub Company (SPRT) because the company's shares are not expensive but yield 3 per cent.
He says: "Spirit Pub Company, which was demerged from Punch Taverns in 2011, would be my contrarian bet for 2014. While the shares are up since the start of 2013, they have significantly underperformed peers such as Greene King (GNK) and Restaurant Group (RTN). The shares are not expensive, trading on a price-to-earnings ratio of only 11x, which is a significant discount to other companies in the sector, and offer an attractive dividend yield of 3 per cent.
"Spirit operates pub restaurants under a range of brands, including Chef & Brewer, Fayre & Square and Flaming Grill. New management was brought in a few years back and set about reviving the fortunes of the business. There has been significant investment in the brands, the estate, infrastructure and people. The results have been encouraging, like-for-like sales growth has been 10 per cent over the past two years and profit margins have been increased.
"While recent trading has been strong, with like-for-like sales growth running at around 4 per cent year on year through the second half of 2013, we think the market remains sceptical that the turnaround plan is delivering. In addition, Spirit lacks a pub roll-out story that other companies such as Greene King offer. We think this could change. In recent years, cash generation has largely been used on the business transformation programme. This has now largely been completed. With a debt financing recently completed we think Spirit now has the cash resources to support the profitable roll-out of its brands.
"Continued strong trading, an improving consumer environment and the potential for new pub openings to offer another growth leg to the story could unlock attractive shareholder returns in 2014."
The last IC recommendation on Spirit Pub Company PLC shares was Buy at 75p on 22 Oct 2013. The company is trading at 72.25p (9 December 2013).
