Two pub IPOs that may whet your appetite

Is owning a pub as much fun as visiting one?

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published September 26, 2013 2:29 pm AEST

If trying to decide what beer to try next is one of the simple pleasures of life, then you will be pleased to soon have more choice in investing in pubs. Owning a pub may be a dream for some, and two upcoming initial public offerings (IPO) could make that dream a reality.

Later this year, the Redcape Hotel Group, made up of 71 hotels along the eastern coast, is planning to list on the ASX for a total estimated market capitalisation of around $300 million. The company leases its bars to Wesfarmers' (ASX: WES) liquor division.

It has the financial backing of two US equity firms, Varde Partners and York Capital Management, which originally teamed up with Goldman Sachs to recapitalise the company, although since then the investment bank has sold its share.

Another IPO on the horizon scheduled for early next year is the Australian Pub Fund, which is being backed by such famous business names as Geoff Dixon, former head of Qantas (ASX: QAN) and current head of Tourism Australia, and entrepreneur John Singleton.

The company currently holds 12 pubs, and has recently purchased The Exchange pub in Brisbane for a record $34 million in that area. In total, it is projecting to hold a total of about $400 million in assets, which will also include marina properties.

Until the two IPOs occur, investors can indulge in a little nip with the ALE Property Group (ASX: LEP). The group operates 87 pubs, currently has a market capitalisation of $521 million, and is 8.7% owned by Woolworths (ASX: WOW). The company can give you an idea of how the two IPOs may perform.

It has a stable revenue stream, yet sales have been roughly the same since 2007. You could chalk that up to downward discretionary spending during the GFC, but for investors that doesn't give much return. Earnings have been up and down — two net losses in the past four years — so it is hard to gauge future profit expectations.

Foolish takeaway

There will always be a place in our hearts for our favourite pub or hotel, but as investors it is best to look over the financials with a stiff black coffee, and see what the future may hold for these pub business opportunities. You want growing companies with good profit margins and return on equity. Sometimes it is best not to mix business and pleasure, or you might end up crying in your beer.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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