Losing Spirit

Spirit, a group of pub chains recently demerged from Punch, posted a profit in today’s full-year results, it’s first as a newly independent company. But heavy write downs have changed the value equation.

Spirit has hitherto looked cheap compared to the book value of its assets, so as a profitable company it could be a  bargain if it's still selling at a discount. Disregarding intangibles, goodwill and deferred tax assets, this is the situation:

Spirit has changed its accounting to value property, plant and operating leases at market value rather than historic cost, a revaluation which reduced the book value of property, plant, and equipment by £350m and operating leases by £10m. 

The 'value' has flown. At historical cost, the company would be selling at a 30% discount to tangible book value, now the share price values it at almost a 100% premium. When book value can disappear at an accountant's keystroke, it justifies the hard-nosed position of hard-core value investors who insist on a steep discount. 

Movements in property values should not have a bearing on Spirit's earning power, but valuing Spirit by its potential profit is speculative because it has no history in its current form. 

Management strikes a confident tone, sales are growing at its managed pubs, and Spirit is planning to dispose of underperforming leased pubs. It's proposed a dividend, but I think it would take too much effort, and it may not even be possible, to gain enough confidence in Spirit to add it to Thrifty 30 portfolio.