Leading analyst Douglas Jack says he believes Marston’s repositioning of its pub estate should allow it to generate double-digit earnings growth over the long-term, although increased disposal activity led him to cut his pre-tax profit forecast for 2014 and 2015.
Marston’s this morning reported that it has sold 202 pubs for £90m to NewRiver Retail Limited, a specialist REIT focused on the UK food and value retail sector. Jack, of Numis, issued a Buy recommendation for the company at a Target Price of 185p saying that its pre-tax profit this year is slightly ahead of his forecast.
“In 2013, Marston’s sold 130 pubs for £46.2m (15x EBITDA). In 2014E, we expect the company to sell 380 pubs for £155m or 10x EBITDA. Over the next three years, we expect £250m of proceeds for 12x EBITDA, of which £230m should be spent on 81 new builds at an average cost of 6x EBITDA (with the new builds creating over £150m of equity value), raising earning quality in the process.
“To reflect dilution from increased disposal activity, we are cutting our 2014E PBT forecast to £85.5m (11.9p EPS) from £94.0m and 2015E PBT forecast to £98.6m (13.7p EPS) from £102.0m. In early 2014E, P&D LFL sales are up 3.1% (vs our 2.5% FY forecast) and Taverns’ managed and franchised LFL sales are up 2.1% (vs our flat FY forecast). Despite the initial earnings dilution, this strategy has been endorsed by the banks, which have extended their facility to November 2018.
“The repositioning of its pub estate should put Marston’s in a position to generate double-digit earnings growth over the long-term. Thus, our PBT expectations are unchanged for 2016E, by which point earning quality should be much higher, net debt/EBITDA should be 0.6x lower and dividend cover should be above 2x on the basis of dividends continuing to increase by 5% pa.”
He said Marston’s full year pre-tax profit of £88.4m is “slightly ahead of our forecast” (£88.3m; consensus £90.0m) “with £13.5m (or 24%) growth in Premium & Destination (P&D) EBIT partially offset by £3.1m of disposed EBITDA and £9.8m higher interest costs”.
“However, interest costs are now falling and the repositioning from wet-led tenanted pubs to pub restaurants is accelerating.”
