A leading sector analyst has said that he is impressed by the progress of Marston’s and that its management was right to shift in 2009 from a dividend play to growth story, but warns the brewer and pub operator not to rest on its laurels. Nigel Parson of Evolution also said that he sees the group’s much heralded Retail Agreement for its tenants “as a stop-gap” as the group “waits for better conditions to sell the houses”. Parson said: “Its 2009 rights issue marked an apparently radical strategic shift from dividend play to growth story, and a spooked stock market sent Marston’s stock to Coventry in response. Looking back, we think management was right – its previous strategy was unsustainable. “Success in this new direction should see investors rewarded with a rising dividend and share price appreciation. We are revising our recommendation to Buy (was Add) and boosting our target price to 140p (was 120p), implying 30% upside.” Parson said that although he had been more impressed with the progress at Marston’s managed house division than he had expected, there was a risk that the company could “sit on its laurels now; at precisely the moment it should be placing the foundations for a broader-based growth platform”. However, the analyst said he suspected that “little will change until Marston’s is generating sufficient surplus cash to fund the required initiatives in the absence of a more major disposal”. Parson outlines the key ongoing issues that Marston’s still needs to address, which include more defined concepts/brands, a clearer high street strategy and “building its way to success”. He said: “We get no sense of new concept development projects at Marston’s, as all energies and resources have been poured into the new build programme. We are hopeful that new non-executive Robin Rowland, chief executive of YO! Sushi, can make a difference to Marston’s concept development. “The F-plan and the new-build programme have overshadowed the broader portfolio development within the estate, and the separate identities of Marston’s Inns, Marston’s 2-for-1, Tavern Table, Taverner’s Carvery and Service That Suits Me seem to have been downplayed.” Parson said that he was concerned that the group’s Retail Agreement initiative would be a distraction for the managed house management, as staff and time are diverted to ensuring that the tenanted initiative succeeds. He said: “Marston’s argues that it is leveraging its overhead and back-office capability, but we would be happier if resource were more focused on some of the issues outlined in this section.” On the group’s high street strategy, Parson believes that this has “shrunk to that of containment and the company needs to either reinvigorate this area, or exit”. He estimates that the three brands (Pitcher & Piano, Bluu and Que Pasa) are worth £35-70m in total. Parson said that Marston’s new-build pub restaurant strategy is the key driver for recovering cashflow, rising earnings and returns for division and group alike. He said: “For 2010-15, we expect this division to generate a 9.3% five-year CAGR in EBIT, and account for 75-98% of YoY group EBIT growth. The strategy should be entirely funded from cashflow from FY13E.” Parson heralds Marston’s as the “most savvy and innovative tenanted operator”, and said it deserves to be the first achieving EBIT growth following four years of decline. He said: “One crucial factor has been the success of its Retail Agreement in stabilising trading in Marston’s tail estate. We see this initiative as a stop-gap, however, as Marston’s waits for better conditions to sell the houses and recycle the capital into the top end of its managed estate where returns are higher and more sustainable.” Parson said the company faces two challenges going forward for its tenanted estate; Stop the haemorrhaging of profits and cash from the tail estate and protect their capital value and maintain or grow profits and cashflow from the core estate. He concluded: “Currently Marston’s is trading on 8.8x for FY12E EPS, just above the five-year average low of 8.9x. We believe the stock market is discounting the tough outlook, its tenanted and debt profiles. But we also believe investors are giving Marston’s scant credit for a self-help agenda that is already delivering meaningful results. “This view is reinforced by the continuing value analysis that suggests Marston’s will continue being value-destructive. We expect returns will improve as the new build programme gathers pace.”