Leading analyst, Douglas Jack, of Peel Hunt, looks at some of the key points emerging from Fuller’s preliminary results last week and trends supporting the company’s growth.
He explains why he believes that further refurbishment activity in the current financial year combined with a strong culture for differentiated, premium product and service, should help like-for-like sales remain amongst the highest in the sector:
“Product range
Customer demand is continuing to gravitate towards premium products to which Fuller’s range is orientated. In 2017, its managed drink sales growth was helped by the move to higher-margin craft products in all categories. It is constantly evolving its range in order to be differentiated from the competition, using exclusive supply contracts where possible.
Managed margins
Strong LFL sales (6.6% in early 2018E), customers trading up (which is as important as price increases) and growth in high-margin products, like coffee and accommodation, are helping to offset higher costs. In 2018E, Fuller’s believes 4% growth in LFL sales will be needed to maintain managed margins. It is better placed than most to achieve this.
Tenanted estate
We believe it is positive that Fuller’s is now using a turnover-based tenancy agreement, which is generating encouraging returns in the first six sites. Should the company grow to having over 500 pubs, this should de-risk the tenanted model from the MRO legislation. Also, it should provide motivation to drive stronger sales growth, in all product categories, assisted by the application of managed pub disciplines.
Balance sheet
We forecast net debt/EBITDA falling to just 2.0% in 2020E, which we view as being low for a c90% freehold South-East England-orientated pub estate. We estimate that the company could spend over £100m on pub acquisitions (at 10x EBITDA) and still have a net debt/EBITDA ratio that is under 3x in 2020E.
Risks
Our forecasts assume no major change in the political and economic backdrop. For example, Labour’s recent election manifesto included a 800bps increase in corporation tax, equivalent to an immediate 10% reduction in EPS across the market, which could have many large negative consequences.
We would buy the shares, which have de-rated over the last two years.”
