Marston’s chief executive Ralph Findlay spoke to M&C Report about new concepts, disposals, restarting the new build process in its Taverns division and why he doesn’t care what BrewDog thinks…
New concepts
Findlay said the company was still assessing the impact of new trading models such as Generous George and Ebb & Flow, with expectations that it will take six to nine months of trading before it becomes clear whether a wider rollout would be feasible.
There are currently three Generous George sites and four Ebb & Flows.
Findlay said: “One of the dangers of the pub sector is that it all gets a bit samey. Do consumers really differentiate between a Hungry Horse and a Harvester? These models are about trying something different, making sure we our pubs have a different look and feel about them.
“Ultimately it’s about whether these ideas are driving sales and it’s a six to nine-month assessment to establish that.
“I certainly wouldn’t rule out further pilot sites for those two.”
Asked whether there would be further concepts, Findlay said: “I think we’ve got enough on our plate at the moment.”
Disposals
The first half of the year saw Marston’s dispose of 65 pubs against a full-year target of 200. Findlay said it was “unlikely” that any pubs would be sold as part of a bulk deal.
He said: “The nature of these pubs is very much that they would be individual sales.”
The 1,632-strong Marston’s estate is currently broken down into 380 Destination & Premium, 909 Taverns and 343 leased. He expects an increase of 30 sites in Destination & Premium, a 109 reduction in Taverns and 23 fewer leased pubs, bringing the total estate to 1,540.
Growth focus
Findlay said the company had seen a 40% increase in costs for new builds with an extra £100,000 to £200,000 per site versus five years ago, reflecting both increased competition and higher standards of environmental costs (“Building bike racks for employees who don’t cycle to work and electric charging points which no one ever uses”).
He said as a result the company would be realigning the focus of its growth strategy. He said whereas the current target is 25-30 new-builds and two to three lodges a year in its Destination, this will eventually see 20-25 new builds, with the focus on freeholds, and five lodges, mainly leased.
He said the company would continue to convert pubs from the Destination arm to its Premium division but there would also be a target of two to three leasehold sites.
He said: “These will be opportunistic. It will depend on the site as to whether they are better suited to a Pitcher & Piano or a Revere site. The landmark locations tend to lend themselves better to P&P. I don’t have any kind of ratio in mind in terms of how those two to three openings a year are split.”
He said any lodges with up to 40 rooms would be managed by Marston’s with bigger sites handled as a partnership with an operator such as Travelodge.
He said the company remained relatively under-represented inside the M25 compared to the rest of the country, adding: “It is now near impossible to get decent sites in London. You have got casual dining operators coming in prepared to pay seven-figure premiums just to get the sites. That’s a pretty big roll of the dice.”
The future for the Taverns segment includes restarting the process of new builds with a site in the North East already being considered for the “first new build Tavern for a significant period of time”
Average profit per pub across the estate have risen 27% since 2012 to £93,000. Compared with last year average profit per pub is up 17%, with Taverns leading the growth with a 19% increase. Average profit in Destination & Premium was up 3% and Leased 4%.
Brewing
Findlay said Marston’s had seen growth in the off-trade market, which now accounts for more than 50% of the total beer market. He said the company leads both the premium bottled ale market (23% share) and premium cask ale sector (20%).
On the Thwaites acquisition he said that for the time being both the Wainwright and Lancaster Bomber brands would continue to carry the Thwaites banner with a decision being in future on whether they would be explicitly branded as Marston’s products.
He said the craft beer movement had helped to reinvigorate the ale market in a wider sense.
Asked for his reaction to repeated criticisms from craft brewers such as BrewDog to larger brewers producing craft products, he said: “I couldn’t care less what they think. Is BrewDog’s ambition not to grow?”
MRO
Findlay reiterated that Marston’s was comfortable it would be out of the scope of the market rent only (MRO) option element of the pubs code with the Government set to legislate on the exclusion of franchises. He said he thought the General Election result would be largely positive for the pub sector in its negotiations over the pubs code.
He said: “The Conservative party were never in favour of the MRO in the first place, they voted against it. However it is in the legislation now so it comes down to negotiations on the rest of the pubs code. For those pubcos that are involved in those discussions I think it is positive to have a majority Conservative Government.”
Outlook
Findlay said that unlike many other pub companies, Marston’s was looking forward to relatively soft comparisons with last summer with the World Cup having had little effect on Marston’s sales. In contrast, he said the first half of the year had been up against strong comparatives.
Analysts’ reaction
Douglas Jack, of Numis, said: ”H1 PBT rose 2% to £29.6m (we forecast £29.5m), held back by an anticipated £2m increase in pension costs (all occurring in H1) and disposals taking £3m off EBIT. After adjusting for these factors, underlying H1 PBT growth was 15%, the same pace of growth we forecast for H2.
- Destination & Premium (D&P) LFL sales grew 1.5% in H1, with margins up 50bps and operating profits up 10%. Eight new builds opened in H1, with the full year target of 25 retained. Recently-added new builds have been re-valued up by 40% relative to their build cost. From H2, new builds should start to include some leasehold sites (possibly for Revere and Pitcher & Piano), and five new accommodation lodges pa should open from 2016E (up from three pa).
- In Taverns, managed and franchised pubs grew LFL sales by 1.4% in H1, with average profit per pub up 19% due to disposals (65 pubs were sold for £26m, or 21.7x EBITDA) and strong trading in franchise pubs, which now account for 520 out of 909 pubs. In the Leased estate average profits per pub were up 4%. In Brewing, ale volumes were up 4% and operating profits were up 10%.
- We are holding our 2015E forecasts (PBT £91.8m; consensus £91.5m) which assume 2.5% LFL sales growth in P&D, 2% LFL sales growth in Taverns, 1% LFL profit growth in Leased and slightly positive Brewing volumes. D&P LFL sales were up 2.0% during the five weeks to 9 May, with a 0% comp for the rest of H2 (vs 5.7% in H1). Similarly, Taverns’ LFL sales were up 2.8% during the five weeks to 9 May, with a 0% comp for the rest of H2 (vs 3.8% in H1).
We forecast 33% earnings growth over the next three years, with net debt/EBITDA falling by 0.5x over this period despite strong expansion and attractive dividends, yielding over 4%. We estimate that EBITDA growth/dividends should drive a 27% equity return over the next two years if the EV/EBITDA rating holds.”
Mark Brumby, at Langton Capital, said: ”Marston’s has confirmed that trading continues to be in line with expectations. In line with industry comments, it would appear that Q2 was somewhat more challenging than Q1.
”Big days remain important, Easter was good and the end-May Bank Holiday / Half Term / Pay week will be important in determining the outcome re Q3.
”Marston’s says ‘the second half year has started well’. LfL sales in Destination + Premium are +2%, Taverns are +2.8% and Leased profits are ‘in line with expectations’. Brewing is also in line and ale volumes are +4% volumes up 4% for the year to date. Comps are tough until around now then ease off through the remainder of Q3 and Q4.
”The group says ‘after an encouraging first half year, we expect to make further progress for the remainder of the year’ and generally reassures that trading is satisfactory.
“Overall, with its new-build programme still firmly in place, much of Marston’s success has been of its own making. The group has not been aided by geography as it operates a largely provincial estate.
”Earnings are set to move forward this year and next as the group has now worked through the period of dilution caused by the disposal of its bottom-end, tenanted units.
“Despite the recent share price increase, the group’s shares trade on an undemanding 12.9x this year’s earnings falling to 11.7x in FY16. The yield is a healthy 4.3% this year and 4.5% next.
“Consumers remain value-driven. In addition, some of the emphasis on spending is currently on big-ticket items but spend on affordable treats should be on the up by the end of the calendar year.
”The economic outlook is brighter than it has been for some time. Real wages are growing, unemployment continues to fall and the election uncertainty is now behind us. Interest rates are not likely to rise in the very short term and we would suggest that Marston’s strongly asset-backed shares offer good value.”
