The leisure sector has been hammered by Britain’s austerity measures. The more expensive restaurants located outside of London have been getting the worst of it. However, one chain bucking the trend is pub landlord and brewer Marston’s.
Marston’s manages an estate of 2,146 pubs across Britain. Last week it reported that like-for-like revenues had risen by 2.9% in the year to 1 October, fuelled by demand for its cut-price meal deals. The company said its ‘lunch for a fiver’, special curry nights and a free drink with a sandwich offers boosted footfall.
Marston’s also makes Banks’s, Pedigree and Hobgoblin beers, and brewing volumes rose 2%, with premium cask ales up 5% and bottled beers up 6%. This is in contrast to the rest of the ale market, which declined by 6%.
The success stems from the company’s ‘F-plan’ strategy to promote dining to ‘families, females and forty/fifty-some- things’. Food now accounts for 42% of turnover, compared with 27% in 2004. Overall, said chief executive Ralph Findlay, results are in line with expectations. “Our focus on offering value for money with high service standards in a quality pub environment is generating strong consumer appeal and maximising returns.”
Marston’s (LSE: MARS)
For the full year, analysts are penciling in turnover and adjusted earnings per share of £679m and 11p respectively, and offer a 5.8p dividend, representing a tasty yield of 6%. Net borrowing stands at £1.1bn, so needs to be watched. However, most of this is long-dated and fixed at a blended average rate of 6.9%, so, unless performance slumps dramatically, there should be no need for any future fund-raising. Moreover, with freehold land and property worth around £1.8bn, and if inflation stays high, then I suspect there wouldn’t be too much difficulty in refinancing the bonds anyway.
I rate Marston’s on a ten times 2011 earnings before interest, tax, depreciation and amortisation (EBITDA) multiple, which, adjusting for the debt, generates an intrinsic worth of 130p a share. A major private equity house might be able to pay a whole lot more than that, if it wished to buy its coveted real estate and positive cashflows.
Investors should consider the threat of a double dip, and the risk of escalating food, grain and energy prices, all of which could prove difficult to pass on to thrifty consumers. But Marston’s has hedges in place to guard against nasty surprises, and offers substantial upside to adventurous investors.
Evolution Securities rates the stock a ‘buy’ with a 140p target price. Preliminary results are due out on 30 November.
Rating: SPECULATIVE BUY at 90p (market capitalisation £515m)