FTSE 100 hospitality champion Whitbread surprised me when it sold off its Costa coffee chain, which I considered to be the ‘crown jewels’ of the enterprise. However, the directors had the advantage of inside information, so I’m not going to argue.
A long-term decision
But I have no such reservations at all about Fuller, Smith & Turner’s(LSE: FSTA) recent sale of The Fuller’s Beer Company, its brewing arm, for a cool £250m.
Today’s full-year results report for the trading year to 30 March reveals to us that discontinued operations (brewing) delivered a 14% contribution to gross profit figures and continuing operations provided the remaining 86%. Yet brewing accounted for around 33% of the year’s revenue, so the margins in that business were thinner, it seems.
Great! The company can pocket the £250m provided by buyer Asahi Europe Ltd and move on with its best-earning assets still on the books and earning ongoing profits.
And those continuing operations consist of Managed Pubs and Hotels, which delivered like-for-like sales growth of 4.9% compared to the prior year, and Tenanted Inns with a 1% increase in like-for-like sales.
Chief executive Simon Emeny said in the report that the sale of the beer business was a “transformational move.” He explained that it was a long-term decision that gives the directors a “clearer focus” regarding sustainable growth from the “higher-margin” part of the business that remains.
A bold move?
I’m a big fan of ditching underperforming operations in a business, so have no reservations at all about the company’s decision to sell. If managements don’t engage in nipping and tucking operations from time to time, how can they optimise an enterprise for maximum efficiency and profitability? If directors don’t direct, they tend towards being merely administrators, sitting behind their desks perched on fat wallets, in my view.
But I think Emeny sounded a reminder about the risks of economic cyclicality in the hospitality sector. Indeed, he went on to say the proceeds of the sale give the firm a cushion of funds to deal with “potentially turbulent times ahead as the UK navigates the implications of exiting the European Union.”
There’s a sharp contrast in FSTA’s feelings about Brexit and those of the directors of premium alcoholic drinks supplier Diageo, for example, who effectively said in its full-year report today: Brexit? Not bothered, Mate. Won’t affect us much.
The clear difference between the two firms is that Diageo has a vast international base of customers whereas FSTA’s operations are all in the UK. But I reckon it’s hard to get a definite steer because the authors of each outlook statement regarding Brexit will have their own Leave or Remain filter through which all information must pass, whether consciously or unconsciously! That may seem like a whimsical point, but I reckon it’s a ‘thing’ in the world of investing today. A thing that potentially muddies the investing waters even more than they were already muddied.
For what it’s worth, I’m not planning on buying shares in FSTA any time soon. But that’s because of its general cyclicality, not because I disagree with the sale of the brewing business.