Sahill Shan of N + 1 Singer has reinforced his Buy recommendation for Marston’s.
He said he continued to favour the Marston’s self-help organic growth story.
He added: “The FY14 finals showed that unlike a number of its sector peers, it has good strategic and earnings momentum despite the handicap of very little South‐East exposure. From a macro‐perspective we see its value focus as being in the sweet spot given an improving outlook for consumer disposable income. Our 3 year EPS CAGR is 9% and supported by a c.5% yield. ROCE at c.7% (6.5% WACC) is admittedly not great but the trend is positive. We use this note to formalise our forecast changes to reflect the factoring in of a pension charge and higher H/O costs. Our revised 12m TP is 170p, implying 21% TSR.”
In his note he said: Good Strategic Momentum – FY14 finals showed the strategic drive to improve the quality of earnings as being well on track. Destination & Premium (DP) EBIT in the year progressed by c.10% on our estimates; profit / pub was +10% (+19% over 2 years); and 75% of profitability is now derived from pubs directly controlled by Marston’s, up from c.50% 2 years ago. Current trading is encouraging with DP LFL’s of +2.1%.
“Secure Site Pipeline – The new site pipeline for FY15 is secured (at least 25) and there is good visibility for FY16 and FY17. We envisage a GNK/SPRT merger as lowering competitive tension to secure new sites from Marston’s perspective. We would argue the group is relatively unaffected by the beer‐tie proposal given high franchise bias (32% of estate) and the drive to be out of tenancies by FY16. Admittedly the Leased earnings exposure is c.7% but rent reviews will be staggered over 5 years.
“Two Peripheral Negatives – Firstly, recent sale and leaseback transactions (£158m value) have to be treated as an associated liability owing to the fact that freehold reverts to Marston’s at the end of the term at nil cost means leverage last year was 6.2x vs. 5.4x ex the property. Secondly, FCF at c.£50‐60m is not sufficient to support both growth capex (c.£100m) and DPS (£40m). To this end, further churn is being undertaken (£70m FY15e), albeit the cash is recycled into higher returning projects. Net, whilst Marston’s has other sources of financing, leverage is set to stay high over the next 3 years at c.6x we estimate.
“Forecast Changes – We make a number of adjustments to our estimates, primarily factoring in the IAS19 pension charge; higher H/O costs and lifting our pub churn assumption. This feeds through to a 6% / 8% downgrade to our FY15 / FY16 EPS and brings us in line with consensus. Our new 12m TP is 170p (163p) – blended FY15e EV/EBITDA SOTP (146p); 13x P/E (165p ‐ c.10% sector discount); and EVA (204p).”
