A leading analyst has said that the recent full-year results from Marston’s provided further evidence of the company accelerating the transformation process to become a predominately managed pub operator.
Sahil Shan from N+1 Singer said: “We welcome the pro-active approach management is taking to aggressively lower Marston’s exposure to the structurally challenged segments of the pub market. We would encourage investors to look through the ST EPS dilution and the prospect of a much improved quality of earnings by FY16, comprising of c.1550 pubs (vs. 2050 in FY13). From this revised portfolio, management will have a direct influence on >80% of pubs (vs. c.50% currently) to deliver stronger EPS growth and better returns.”
Shan said he expects execution of this operational shift to support a re-rating of the shares.
He said: “With its main peers Greene King trading on a cal’15 P/E of 12.4x and JDW on 13x, an average implies fair value of 12.7x, suggesting good scope for a re-rating for MARS shares on 10.8x. We are supporters of the strategic momentum, and feel it is important to look through the near-term EPS dilution and focus on the prospect of 13% CAGR in EPS over FY14e-16e. We set 163p (157p) as our revised 12m TP based on a blended FY15 P/E of 13x and 9.5x EV/EBITDA. We maintain a Buy.
“Marston’s progress in FY13 was held back by the Q2 snow, increased divestment activity and a step-up in interest costs. Adjusting for these and the 53rd week, we estimate underlying PBT grew by 13% to £98.8m, vs. a headline figure of £88.4m (£87.8m FY12). This growth was primarily driven by the strategically important Destination & Premium division (D&P), which witnessed a 24% uplift in EBIT on 14% sales growth. LFL’s for D&P amounted to 2.2%, with H2 a much stronger 4%. Current trading is strong, with LFL’s at D&P of +3.1% for 7 weeks to 23rd Nov and managed/franchised pubs within Taverns +2.1%.”
On a three year view, Shan estimates total disposal proceeds of c.£250m (12x EBITDA), of which £230m should be recycled into building c.80 freehold D&P pubs on a 6x EBITDA multiple.
He said: “With these investments generating >15% ROCE vs. a 6.8% WACC, there is clear financial a strategic logic in the two-pronged strategy being pursued. To reflect the 202 unit divestment, but no further upward guidance to new D&P openings (25-30 / annum), we lower our FY14 EPS by 8% and by 3% for FY15.”
