Marston’s — Update 27 November 2015

Marston’s — Update 27 November 2015

Marston’s

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Marston’s

Programme completed, more to come

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27 November 2015

Price

169.00p

Market cap

£972m

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Share details

Code

MARS

Listing

LSE

Shares in issue

575.1m

Business description

Marston's is a leading independent brewing and pub retailing business operating a vertically integrated business model. It has c 1,600 predominantly freehold pubs and bars across the UK, in managed, franchised and leased formats. It also operates five breweries.

We operate five breweries:

Bull

Able management team committed to an effective commercial strategy.

Improving path for return on capital.

Visibility of continuing business development.

Bear

Tendency to forgo the risk but also return from acquisition opportunities.

ROCE at 8.7% post-tax is not dramatic.

Debt:EBITDA of 5x looks high, despite freehold backing.

Analysts

Paul Hickman

+44 (0)20 3077 2501

Richard Finch

+44 (0)79 0057 0522

Marston's preliminary results mark the successful completion of its three-year transformation programme. This included a comprehensive reorganisation of the pub estate with a 25% overall reduction and a 37% increase in average profit per pub to £100k. But progress is far from over. The company is in a stable state, and able and willing to operate the levers of future growth. The steady improvement in return on capital may not be the most dramatic number compared with the double-digit earnings growth in these results, but holds the key to the assurance investors can place in the prospect of continued income growth.

Strong finals

Final results were strong, with underlying revenue up 7% to £845.5m, operating profit up 6% to £165.4m, PBT up 10% to £91.5m helped by interest reductions, and EPS up 10% to 12.9p. Leverage reduced 0.3x to 5.1x. Performance was well spread across the estate, with the two main arms Destination and Premium, and Taverns, posting like-for-like sales growth of 1.8% and 2.0%, and operating margin up 0.3% and 1.3% respectively. The brewing division, which accounts for 11% of operating profit but has an organic link to the pub estate and the culture of Marston's, grew profits 19%, boosted by the acquisition of the Thwaites beer business. Net debt of £1,245m represents 59% loan to value on the 96% freehold estate. The company reports that the current year has started well.

Trading and estate actions are improving returns

Marston’s has been active in adapting its offer to the fast-changing pub market, and is well prepared for the future, with investment on new-build pubs targeted to run at £60-70m pa (at a freehold return of 13-15%) and continued roll-out of its high-control franchise model, which increased by 80 to 550 pubs out of the Taverns total of 859 (vs Destination and Premium 397, and Leased 341). As a result of its effective estate management and trading actions, its cash return on investment (pre-tax) is slowly but surely cranking up from 10.6% in 2012 to 10.8% now.

Valuation: Reliable for dividend growth

On an FY16 consensus P/E of 12.3x and prospective yield of 4.3% (1.8x covered), this is a company that investors can rely on to continue to adapt and improve its performance and returns. As a consequence, we believe that fair reliance can be placed on the prospect of continuing income growth.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

787.6

83.0

11.6

6.7

14.6

4.0

09/15

845.5

91.5

12.8

7.0

13.2

4.1

09/16e

892.0

98.7

13.7

7.3

12.3

4.3

09/17e

933.8

105.2

14.8

7.7

11.4

4.6

Source: Bloomberg

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Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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US

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Level 25, Aurora Place

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Wellington +64 (0)48 948 555

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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