The cold weather in December sent a chill through the pub industry over the busy Christmas period. However, you wouldn’t have thought so from reading Marston’s upbeat trading statement for the 16 weeks to 22 January.
Its inns and taverns division – Pitcher & Piano – achieved like-for-like (LFL) revenues up 2.1%, powered by tasty food (4.4%) and drink (1.2%) sales. Operating margins (40% of group) were slightly ahead of last year. Meanwhile, in its breweries unit (10%) – offering Banks’s, Pedigree and Hobgoblin beers – volumes fizzed up 6% compared to a British ale market down 7%. The only mild headache came from its pubs division (50%), where LFL profits fell 1%.
This success stems from its “F-plan” strategy to promote “food, families, females and 40/50-somethings”. Food now accounts for 38% of sales, compared with 27% in 2004. Another reason for the positive momentum is that rival Punch Taverns is struggling with loans and trying to off-load sites. If its bondholders take control, Marston’s could benefit by winning contracts to manage some of its pubs. It’s also a terrific income play. For the year to September, the City is forecasting a dividend yield of 5.8%, which is 1.8 times covered by earnings. No wonder in February retiring director Derek Andrew splashed out £200,000 on the stock for his pension.
Gamble of the week: Marston’s (LSE: MARS)
Granted, net debt at £1.1bn needs to be watched. Yet virtually all of this has been fixed at pre-set rates and has an average duration of seven years. So, unless performance slumps dramatically there should be no need for any future fund-raising. Moreover, with freehold land and property worth around £1.75bn, if inflation stays elevated I suspect there wouldn’t be too much difficulty refinancing the bonds anyway. In terms of valuation, I would rate Marston’s on a ten-times 2011 EBITDA multiple. After adjusting for the debt, that generates an intrinsic worth of about 140p per share. A major private-equity house might be able to pay a whole heap more.
So what do we need to watch out for? Mainly escalating food, grains and energy costs. These could be difficult to pass on to a more stretched consumer. That said, the firm is hedged and offers substantial upside for adventurous investors.
The next trading update is scheduled for 16 March.
Recommendation: SPECULATIVE BUY at 95p