M&C Report takes a closer look at H1 interim results from Fuller’s, the London-based pub operator, and talks to managing director Simon Emeny. Acquisitions Emeny said the seven pub purchases the group made during the period could be categorised into three groups: development opportunities, London gems, and individual tenanted inns. Emeny said the group also had a fourth category for sites that it can “adapted quickly” such as the five Marston’s site its recent acquired for £16m. He said: “This agreed acquisition strategy allows us to add value in different ways and gives us greater flexibility. We will continue to take our time over acquisitions and look to cherry pick high-quality assets.” He said that the new £30m banking facility would allow the company to continue to make “strategic acquisitions” going forward and the group was in advanced negotiations to add “a few more” in its current financial year. It said that the White Swan Hotel, Stratford-upon-Avon and The Crown Inn, Bishop's Waltham are freehold development opportunities. Emeny said: “We have traded at The White Swan through the summer whilst we applied for planning consent. This has now been received, and the refurbishment works are underway. The hotel is now closed and will reopen in Spring 2012 with the 41 bedrooms transformed to our stylish boutique standard.” On acquisition The Crown Inn, a 16th Century listed building was closed and in a very poor state. The group has received planning approval to substantially redevelop this property and it will also reopen next spring with eight new bedrooms. Emeny said: “We will invest £4.4m in developing these two properties compared to an initial acquisition cost of less than £3m. These are exciting opportunities for Fuller's and we are actively seeking other sites where we can create value through major investment.” The Lamb & Flag and The Cabbage Patch are London gems. Both were previously operated by pub entrepreneurs. Emeny said: “The Lamb & Flag is located in Covent Garden, an area where we have been building our presence in recent years, having previously been under represented. We believe that both of these sites will respond very well to Fuller's branding.” The group acquired the leasehold interest in both of these properties and have negotiated the option to purchase the freehold of The Lamb & Flag for an agreed price in 2013. Emeny said: “We have acquired three freehold pubs for the tenanted Inns division for £6m. They are all established, high quality London sites and trade very well. With our strong balance sheet and low cost of funding we are able to take a long term view when making these acquisitions.” Managed pubs and hotels Operating margins declined from 13.8% to 13.2% across the division and the group said the was down to three key factors. Emeny said: “We have made lower margins on drinks sales as we have not been able to pass on the full 7% excise duty increase to our customers by raising drinks prices. Unless the duty escalator is abolished, we expect this margin dilution to continue. As we embark on a period of investment and expansion in our business we have increased our head office resource to support this growth, with a particular focus on staff scheduling systems, food, digital marketing and IT. Finally, as expected the development sites acquired during the period have reported lower margins than the residual business. Once development is complete these sites will help improve our overall margin.” Tenanted The company again capped RPI-linked rent increases to 3% to support its tenants in what is said had “been a tough trading environment for any small business, particularly within our sector”. Emeny said: “Our partnership approach with tenants in these times is particularly valued, with vacancies at their lowest level in four years. The average tenure of our tenants is six and a half years, an impressive statistic for the industry.” Since March 2010, Fuller’s has sold eleven tenanted pubs raising £4.3m, overall realising a small profit against book value, which it said had been reinvested in new acquisitions for the division. Olympics Emeny said the company had been working for the last three years on its strategy for the London Olympics. He said: “We see it as a superb opportunity which we are geared up for but we have also put in a lot of work on the risk side of the event. We will have a lot of activities taking place over the next year in the build up to the Games.” BISC announcement Emeny welcomes the announcement by the government not to implement a statutory adjudicator for the pubco/tenant relationship. He said: “This is the right outcome and a vote of confidence for the tenanted model. It is now up to companies to follow the code of practice laid down stringently.” Beer company The group said that its cumulative growth in export and off trade volumes in the last three years was 31%. Emeny said: “In order to meet future demand we are investing £4.5m in building further tank capacity for the conditioning of bottled and keg beer.” He said that the project added 30,000 barrels of capacity, equivalent to around 40% of current annual sales and that the infrastructure had been built to allow the group “to almost double its size at a much lower incremental cost at a future date”. However, the groups aid the construction had been “very disruptive” to its site in Chiswick. He said: “Faced with capacity constraints while the tanks were being built, we chose not to promote as aggressively in the off Trade as we did last year and experienced a small volume decline of 3% in the period. However, our long term strategy remains to grow volumes in the off Trade and following our expanded production capacity, we will increase our promotional activity during the second half of the year to help achieve this.” Share buybacks The company announced that it would recommence the share buyback programme it announced on 30 September, to buy up to a further £3m of the company's existing issued share capital. Any shares purchased will be cancelled or held in treasury. In the year to date the company has purchased 270,750 shares at a total cost of £1.82m. Analyst reaction Simon French at Panmure Gordon, said: “Trading trends have been broadly maintained into H2, and the group has increased its bank facilities to support its selective acquisition strategy. Fuller’s trades on a CY 2012E P/E of 17.7x and an adj EV/EBITDAR of 9.2x for c4% CAGR in EPS over the next three years. We think that the rate of forecast earnings growth, a relatively low yield and a split share structure cannot support the premium valuation. We reiterate our Sell recommendation and 545p price target.”