Following Marston’s trading update for the 42 weeks to 20 July 2019, leading analysts from JP Morgan, Peel Hunt, Liberum and Goodbody share their reactions to the figures, which have been described as “slightly disappointing” in Q3.

Analysts at JP Morgan said they expected shares to be weak following the latest trading update by Marston’s which revealed “slightly disappointing” Q3 like-for-likes.

“D&P (Destination & Premium) LFL growth was +0.1% for the 42 weeks, implying approximately -1.5% for the 16-week period of “Q3”. Taverns LFL growth was +1.1% for the 42 weeks, implying approximately -3.5% in Q3. Brewing volumes were said to have weakened in Q3, and this is also probably attributable to the weather,” read the note.

The note stated that as the operating margin is in-line with expectations, it therefore believes the cost environment remains stable. “However, the poor weather’s impact on alcohol sales will likely exert some additional downward pressure. We currently estimate ~20bps of margin decline for the group in FY19E,” it said.

JP Morgan has reduced its FY19E growth estimates for D&P/Taverns from +1.6%/+3.5% to +0.5%/+1.5% as there has been a weakening of the two-year trend. It has also reduced its FY19E for adjusted profit before tax by 3%, “primarily reflecting the LFL slowdown”.

Paul Ruddy, gaming and leisure analysts at Goodbody noted that managed and franchised like-for-likes were both running behind its estimates.

“Overall, it is understandable that the Taverns business has been impacted by weather and events and was facing a difficult comp (Q318 +3.2%). However, the D&P business was only slightly positive in Q3 last year so the performance here is disappointing,” he said. “We will likely reduce PBT forecasts by c.2-3% on the back of this update which would lead to a flat YoY outcome.

“Marston’s trades on 9.1x FY20 EV/EBITDA, at a premium to peers. Although we acknowledge increasing capital discipline, which will lead to deleveraging, we believe ND/EBITDA at 6.0x is high given the inflationary headwinds facing the sector and the potential for macro shocks,” added the note from Ruddy.

Peel Hunt said that the decline in managed like-for-like figures and brewing volumes were “slightly worse than we expected”, therefore it is downgrading its forecasts by 3%, “which is greater than what we predicted in our preview”. Although the weather has improved in July, it has cut its EBIT forecast by by c£1.5m for D&P and c£1m for Taverns. It has also cut its EBIT forecast for Brewing by c£0.5m.

“The good news is that debt reduction plans are being increased with the new build programme taking a three-year breather,” read the note.

“We forecast net debt to fall to c£1.31bn, from £1.4bn, between 2020 and 2021E, reducing net debt/EBITDA from 6.2x to 5.7x, whilst maintaining a dividend that currently yields 6%,” said Peel Hunt. “The recent share price increase partly reflected the 11x EV/EBITDA that Stonegate paid for Ei Group, but this is likely to leave Stonegate as a seller, not a buyer, of pub assets, and those with the lowest leverage will be best placed to exploit this opportunity.”

The slowdown in like-for-likes over the last 16 weeks was also greater than Liberum anticipated, despite the knowledge they were overlapping challenging prior year comparatives with the Football World Cup and the hot weather. It has therefore cut PBT forecasts by 3.1% for FY19E and by 3.5% for FY20E. “We would have expected a better D&P performance which should have been less exposed to these comparatives,” it said.

“More significantly, the company is halting its expansion programme to prioritise debt reduction which we applaud,” it said. The reallocation of planned capex to be invested back into the existing estate should lead to Net debt/EBITDA reducing from 6.2x at end of FY18 to below c.5.0x by FY23E.

The shares have understandably given back some recent gains but still look attractive, it added. “A difficult Q3 trading should not overshadow Marston’s high-quality freehold pub estate, which has delivered positive long term LFLs, and its market leading beer business. Progress on deleveraging is promising and will continue to strengthen the business.”