M&C Report takes a closer look at results for the 52 weeks to 31 March for Fuller’s, the London-based brewer and pub operator, and speaks to chairman Michael Turner. Acquisitions and CAPEX Fuller’s is eyeing acquisitions after purchasing 30 in the last financial year; 24 were freehold and six were leasehold. The firm said: “Our acquisitions strategy is to continue to enhance the quality of our estate, to increase our London presence and to expand our reach into prosperous areas of the south east. To achieve this, we look at both high quality existing businesses to which we can add value, and those which offer significant development potential. Our key selection criteria for an individual site are the local demographics, the character, the location, the qualities of the underlying property and the opportunity for us to enhance the operation.” Turner said: “It’s not really a case of saying, ‘we want one here, we want one there’. It very much depends on opportunities.” Annual CAPEX in the period was £74.7m, mostly through acquisition costs. The estimated figure for 2013 is £22.5m. Current trading The company said it experienced “the most volatile and weather-dependent start to a year that we can remember”, with like-for-like sales in the managed arm down 2.3% in the eight weeks to 26 May, despite 7.2% sales growth overall in the division. Managed: results Revenues in the division increased 6% to £155.7m, with like-for-likes up 4.2%, with the 13 pubs and hotels acquired adding 4% and the one week shorter reporting period reducing the figure by 2%. Operating profits before exceptionals increased 1% to £18.3m due to lower operating margin, which fell from 12.3% to 11.8% due to . EBITDA was up 1% to £26.9m. Managed: new builds Turner revealed that Fuller’s has secured two sites for new build properties, one in Kew in south west London and one elsewhere in the south east - both are river-side locations. “I’m not quite sure when they will open, it depends on planning permission,” said Turner. He said new builds are “not so much a new strategy, it’s just these are the opportunities that have come up”. Managed: Parcel Yard One of the stand-out new openings in the estate has been the Parcel Yard, a Grade-1 listed former postal sorting building in Kings Cross Station, which began trading in March. Turner declined to reveal figures but revealed that it’s already one of the highest taking sites in the estate. “This is just a wonderful pub that just happens to be in a station. We are really excited about it. If we get another opportunity to do something like that we would like to do it.” Managed: refurbishments In total 18 sites received significant investments, which totalled £4.2m. Fuller’s gave examples of three sites - the King’s Head in Guildford, the Thomas a Becket in Worthing and the Barrel and Horn in Bromley - that underwent “transformational” refurbishments, and three with targeted investments aimed at, for example, transforming function rooms or gardens: The Six Bells in Thame, the Pilot in Chiswick and the Rose and Crown in Ealing. “These investments are already showing good returns,” Fuller’s said. Managed: food Food sales grew 4.5% on a like-for-like basis, which Fuller’s said was “predominantly the result of increasing the number of covers, rather than price”. The firm said it also improved margins through holding supplier increases below general food inflation and “enhancing kitchen efficiency”. Managed: drinks and cask growth Like-for-like growth in wet sales increased 4%, and Fuller’s said that growth in cask ale outperformed growth in lager this year. Asked whether cask could soon overtake lager in the estate, Turner said: “I approve of that idea. One can always dream - there’s quite a long way to go.” Nevertheless, Turner said customers were being “more discerning with their pallets” when it came to lager, with much of the growth in that category coming from premium brands. Managed: accommodation Accommodation sales increased 7.4% on a like-for-like basis in the year, driven by an increase of average room rate of 3%. The year saw 134 rooms added to the estate through a combination of acquisitions and redevelopments. At the year end, Fuller’s had 620 rooms across 28 sites, up 28%. Since the end of the year Fuller’s completed a £2.8m refurbishment of one of its recent acquisitions, the White Swan in Stratford-upon-Avon, which has 41 rooms. Managed: digital strategy and developments Fuller’s launches its new website for the managed arm today (31 May). “Amongst many enhancements, this will assist us in promoting events, allow customers to make table bookings online and transform the customer journey for bedroom bookings,” said the company. “The new sites are smartphone and iPad friendly and are integrated with each pub’s social media activity.” One aim of its investment in the digital strategy is to take more room bookings directly through its website, decreasing the amount paid in agency fees. Currently c.78% of all room bookings take place on-line. Tenanted: performance Tenanted division revenue increased 2% to £27.5m, driven in part by acquisitions - 17 were added, with four disposed, in the period. Average EBITDA per pub increased 4% and Fuller’s expects the 17 new pubs to “significantly increase” the figure. Operating profit before exceptional items increased 4% to £10.3m and like-for-like profits were up 2%. Tenanted: investments and training In total £0.6m was invested across 26 pubs, and nearly 50% of its pub interiors have been upgraded in the past two years. Fuller’s said it trained more tenants than ever in the year. It also introduced a mystery shopper service for tenants in the year. Beer Company: performance Revenues in the division increased 5% to £109.1m. Operating profits were up 2% to £9m as operating costs rose 5%. “Operating margin has been diluted due to both the changing sales mix and the impact of beer duty rises,” said Fuller’s. On a comparable 52 week basis, total beer volumes increased 2% and own beer volumes were 1% higher than last year, driven by volumes of own beer sold in Fuller’s pubs growing 3% and export volumes increasing by 22%. For the first time more than 10m pints were sold overseas, accounting for one in six barrels of own beer sold. Beer Company: investment Fuller’s spent £4.5m in new conditioning tanks, added 30,000 barrels of conditioning capacity for bottle and keg beer. “The tanks are now in operation and we have the ability to increase capacity further at a lower incremental cost in the future. This investment allows us to meet the current growing demand for bottle and keg beer, whilst also being flexible enough to produce cask ale should the need arise,” the company said. Tax Total taxes paid in the year were £114m, or 37% of group revenues (including VAT), and the firm hit out at the “disproportionate tax burden” that it’s under. Its total duty bill was £44.6m. Duty has increased by 45% in the past five years, and Fuller’s pointed out that it accounted for 41p on a pint of 4.1% ABV London Pride in 2008, and the figure rose to 54.5p in March 2012. Debt Net debt rose almost £50m to £138.2m following capital expenditure, mainly due to acquisitions, of £75m. “After the arrangement of £60m of additional bank facilities in the year, our total bank facilities now stand at £150m,” said Fuller’s. “The facilities all run until May 2015 and at 31 March 2012 we had £34m of undrawn committed funds.” The pro forma ratio of net debt to EBITDA remains “low”, the firm said, at 2.7 times (2011: 1.9 times), “allowing us continued flexibility to invest in future opportunities”. Analysts Simon French at Panmure Gordon reiterated a Hold recommendation at a target price of 735p. He said: “Fuller’s has reported FY 2012E PBT of £30.3m (39.3p EPS) is modestly ahead of ours and consensus expectations of £29.9m PBT (38.3p EPS). The final dividend has been increased 8% to 7.6p giving a full-year dividend of 12.65p ahead of our forecast of 12.39p. “FY 2013E has got off to a slow start with LFL sales -2.3% for the first eight weeks of the year. We don’t expect any material change to consensus forecast of £32.2m PBT for FY 2013E at this stage. Our forecasts are in line with consensus and leave the stock trading on a CY 2012E adj EV/EBITDAR of 10.0x, which feels high enough. “FY 2013E has got off to a slow start with LFL sales -2.3% for the first eight weeks of the year to 26 May. This compares with -2.0% reported by Young’s for the first seven weeks of FY 2013E but Fuller’s will have had the benefit of the glorious weather of the last week and so it suggests the underlying performance is tracking a bit behind Young’s. Total sales in managed pubs increased 7.2% over the eight week period reflecting the benefit of acquisitions.” He added: “We don’t expect any material change to consensus forecast of £32.2m PBT for FY 2013E at this stage. Our forecasts are in line with consensus. “The stock trades on a CY 2012E adj EV/EBITDAR of 10.0x, which feels high enough.” Paul Hickman at Peel Hunt issued a Buy recommendation. “Fullers has achieved 7% earnings growth and has also invested heavily in its estate both in and out of London. Despite that, its balance sheet remains the strongest of any pub company,” said Hickman. “The value of the shares reflects both the improving value of its property and the trading quality of the operation. We believe Fuller’s will go on adding value in a measured way, shielded from the higher risks of national operators. Its high PER is well merited.”

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