The share price of Marston’s, the brewer and pub operator, has finally “broken out” and should continue to appreciate as its earnings increase, according to leading sector analyst Douglas Jack.
Jack, of Numis, said Marston’s new build expansion programme should continue to be the main source of growth for the company and he estimates that there is a £11.6m upside to pre-tax profit forecasts by 2014 if the current level of returns - 18.5% EBITDA on freehold sites - continues.
Jack issued a Buy recommendation with a Target Price of 130p. Its shares stood at 104p at 4.30pm on 27 June.
Jack said Marstons’ value food offer means its managed pubs are taking share from independent restaurants, while its average prices for food and drink is below its freehold pub peers.
He said its tenanted estate is outperforming its competitors on total estate like-for-like profit, with only Marston’s and Fuller’s reporting total profit growth in their tenanted arms. Its brewing arm is also outperforming, aided by improving product range and distribution.
“Our forecasts, which are generally above consensus, are not based on onerous assumptions,” Jack said. “Also, we estimate there could be good upside (£11.6m or 12% by 2014E) to PBT forecasts if new build sites continue to generate £365,000 of average annualised EBIT vs. our above-consensus forecasts assuming just £194,000.
“We forecast net debt to remain at c.£1.1bn, after all 98% of Marston’s pub estate is freehold, almost all its debt is securitised to 2019-35 and self-financed EBITDA growth is reducing net debt/EBITDA. One-third of EBITDA is generated outside the securitisation structures and could be transferred in if appropriate.”
He added: “Marston’s share price has finally broken out and should continue to appreciate, in our view, to reflect the company’s progress in generating double-digit earnings growth and paying a progressive dividend (yielding 6%) without increasing debt.
“Our 130p target price for Marston’s is consistent with our 9.1x Dec 2012 EV/EBITDA target for Greene King. Arguably, Marston’s deserves a premium valuation, supported by greater organic expansion and growth forecasts, but we expect both companies’ valuations to remain aligned.
“In Marston’s case, we believe a combination of c.10% earnings growth with upgrade potential, 6% dividend yield and no increase in debt is worth buying into at these levels.”
