M&C Report takes a closer look at the H1 results for the 26 weeks to 5 April for Marston’s, speaks to chief executive Ralph Findlay and reports from presentations featuring senior company directors.
Newbuilds
By the end of the financial year Marston’s said it would have opened more than 100 new pub restaurants, with the 100th to open shortly in Dumfries, Scotland. It’s on track to open 27 this year at least, having opened 11 to date. Marston’s aims to open 25-30 pubs in 2015 and 2016; in total the programme would have generated 10,000 new jobs over eight or nine years.
Findlay told M&C Report that he sees “good opportunities across the UK” for newbuilds. Of the 100 sites, 36% will be in the south east, 21% in the south west, 11% in the north, 18% in the Midlands and 14% in Scotland. Twenty five are targeted for Scotland over the next five years.
Peter Dalzell, managing director of Marston’s Inns and Taverns, said that in the past year there had been 10 instances where Marston’s “walked away” from a potential deal where competitors were bidding between £1m and £1.5m per site. “We just can’t see how the economics works for that.” Findlay said Marston’s has a “really good property team” and its ability to get new sites is “not under any threat”. “In terms of the pipeline it’s very solid.” The focus for new builds is near to towns with population of 10,000 or more.
Disposals
Marston’s sold 286 pubs in H1 as it looks to dispose of c600 during 2014/2015. It expects to raise £60-70m from disposals this year and next. The New River portfolio sale generated EBITDA of 7.6 times and Findlay said he hopes disposals this year to be sold at “double digit multiple of EBITDA”; he’s looking for a blended average of 11-12 times across the year. Findlay described the property market as “strong, and it’s particularly strong in terms of interesting pubs”. “We saw that pick up from about the mid point of last summer and it’s remained strong ever since. There’s a very good market at the moment for disposals and that gives me confidence that the targets we have got will be achieved.”
Asked if the disposal programme could progress at a quicker pace, Dalzell said: “It could be faster. The momentum is good. We have said that we will not let book value encumber a decision on disposing of a pub. If it reduces leverage and enhances returns, you sell it. There is a very clear objective to clear those through as quickly as possible.” He added: “As with any estate there’s a rump that will be more stubborn to kick on.”
Around one third of single-site disposals sold by Marston’s are to stay as pubs, of which about half are sold to micro brewers, said Dalzell. “When you look a year on, those pubs that have been sold as pubs have suddenly got planning applications on them. I’m still of the view the vast majority of what we are selling will not be a pub in five years’ time.”
Andrew Andrea, chief financial officer, added: “We are consistently focused on the break-even turnover of a pub; they must take £5,000 a week to break even, below that it is tricky to make a living.” The pubs selected for disposal are under performing and lacking the amenities required for a “modern pub” such as parking and a children’s play area. “These pubs do not have a good future so we are choosing to dispose of them rather than keep a poor performer. There will always be a small churn of assets but not to this scale. It lets us focus on pubs we want to run for the long-term,” Andrea said.
Marston’s has raised £155m through its sale and leaseback model to date. Andrea said: “We prefer to hold on to the freehold of a property [but] we continue to see this as an option for funding future growth.”
Destination and Premium: performance
Like-for-like sales in 356-strong division, which includes Pitcher & Piano and Revere, grew 5.7%, with food at +5.8% and drinks at +4.9%. “These growth rates contributed to a continuing trend of outperformance compared to the market outside London reflecting the good geographic location of our pubs.” Marston’s said like-for-like growth was generated by increased customer numbers and higher spend per head. Main meal sales increased by 16% and food spend per head rose by 4%, with “encouraging signs of growth” in starters and desserts (both +19%) and coffee and tea (both +12%). Food now accounts for 58% of sales (2013: 57%). Overall spend per head in the managed pubs was up c4% in H1. Findlay said: “That’s been driven by volume rather than price because price hasn’t been a major driver for us in the half year.”
Operating margin increased by 0.8%, “reflecting the stronger sales performance in the period and good cost management”. “We expect cost inflation to be relatively low for the remainder of 2014, with significant costs covered by fixed price contracts.” Underlying operating profit of £28.6m was up 18.2%. Capital investment was £53.2m, of which £41m was on new pub-restaurants.
Premium: Revere and Pitcher & Piano
Revenues in the Premium arm grew 8.3%, with operating profit up 12.3%. Marston’s said Pitcher & Piano benefited from recent refurbishments in Newcastle, Hitchin, Tunbridge Wells, Nottingham and Derby; and Revere now comprises eight pubs with the White Lion, Tenterden and Florentine, Sheffield opening in the first half year.
Findlay told M&C Report: “We have begun to look for new sites specifically for Pitcher & Piano. There are a number of sites that we are progressing at the moment in that respect but we haven’t completed them.” Six conversions to Revere are planned for the current financial year; it converted two in H1.
Destination and Premium: Lodges and accommodation
Findlay said he expects to open four or five lodges per year, although that venture is “still in the assessment phase”. Last year Marston’s opened lodges in Chepstow, Aberystwyth, Redditch and Derby, which are “performing well”. Marston’s said: “We expect to go on site in Dunbar later this year, and have also achieved planning consent for a site in Balloch (Loch Lomond) where we will commence construction in 2015.”
Findlay said: “In addition to that I’ve got about 15 ‘land-banked’ sites which have got the capacity for a lodge.” Andrea added: “If for some reason we didn’t want to build the lodge, there are other operators who would look at that, and the pub would benefit from breakfast trade, for example.”
Meanwhile, like-for-like room income at the c50 pubs with rooms grew 11% in H1; the pubs operate c700 rooms between them.
Multiple franchisees
Findlay told M&C Report that for the first time, a small number of franchisees have begun taking multiple sites and “it’s something I think will increase”.
He said Marston’s is getting “a lot more interest” from potential franchisees. “We get many more applicants to take franchise agreements now than we do for tenancy or lease. That’s because people like the simplicity of the model, they like the fact they’re not paying rent, they like the fact there’s no beer tie and it’s all very visible to them. From their point of view the risks are very much managed. We like it because we’re in control of standards and the retail offer. For me the franchise agreement is really the blueprint for community pubs in Marston’s for the future.” He added: “The model itself continues to be developed. We’re listening to what our franchisees are telling us about what they want to see in the offer, and what support they want from us.” Overall 65 pubs were converted to franchise in the period, with 545 franchise sites at the period end.
Franchise: assistance
Findlay said Marston’s has put together a franchise development group and an on-line franchise development council. “They tell us what we should be doing to help them improve their business”. Examples of some “ground breaking” schemes that have been developed include: the “hub cap burger challenge”, where customers are challenged to eat a 32oz burger and chips; the foot-long hot dog; and the “cut-throat curry”.
Franchise case study
Findlay gave the example of one franchise pub that has been a success, the Fairway in Sheffield, which was converted to franchise in 2013 with a £100,000 investment. Since then revenue has grown 27%, with meals served up 25% and drinks served up 26%. Operating profit is 50% higher and margin is up 3%. Return on investment at the site is 40%. The franchisees have since taken a second site with Marston’s. Findlay said it’s an example of a community pub that has a good future. “They say this agreement lets them focus on giving their customers what they want and they don’t have to worry about a lot of the difficult things that Marston’s takes care of in running their pub.”
Findlay said the success of the franchise model means that it has shifted from being a “safety net for tenants into something quite exciting in its own right”.
Taverns
Total revenue in the 1,078-strong division (134 community managed pubs, 545 franchised pubs, 399 tenanted pubs) was behind last year at £113.2m after 286 pubs were sold in H1, including 202 to New River. Subsequently underlying operating profit also fell, from £29.8m to £25.1m. Excluding disposals revenue increased 9% including like-for-like sales growth of 3.8% in the managed and franchised pubs, and the contribution of the pubs converted to franchise style agreements over the last 18 months. Like-for-like tenanted profits were also ahead of last year, Marston’s said. Operating margins were 3.2% lower due to the increased number of franchised pubs. Capital investment was £7.9m.
Community pub improvement
Findlay said: “For the regions to be in growth for us is a significant change in the last few months, and a very positive one.
“Food pubs have obviously performed well, and pubs are taking a greater share of the eating out market, but community pubs are also better. I put that down to a number of factors, including the economy but also the fact the smoking ban is history, that the beer duty has come down for two Budgets in a row, that there’s more interest in beer generally. All of those things are helping the community pub market.”
Leased
Total revenue and operating profit in the division was £25.2m (2013: £26.3m) and £12.5m (2013: £13.1m) respectively, “again reflecting disposals”. Excluding the impact of disposals, like-for-like profits were 3% ahead of last year, Marston’s said. The company said it has a “good pipeline of applicants” and licensee stability remains high at over 90%. Capital investment was £2.5m.
Brewing
Revenue in the brewing division grew 3.5% to £62m. Operating margin was 0.1% higher than last year and underlying operating profit increased 4% to £7.8m. “Overall ale volumes were slightly behind last year with sales to third party tenanted pub companies weaker as a consequence of disposals,” said Marston’s. “However, our independent free trade performance was strong, including growth of 9% in premium ale volumes, and we continue to see growth in the off-trade, principally in bottled ale. We maintained our sector leading position in both premium bottled ale and premium cask ale, with shares of 24% and 18% respectively.”
Andrea said although the company is investing more in its pub estate than brewing, it does not expect its brewing arm to be a cash cow and is therefore focusing on producing new flavours and styles of beers - such as the New World pale ale, Pile Driver ale created with Status Quo, and Charge pale ale created with Elbow - that reflect the move to more premium products.
Current trading
Marston’s said the second half year has started well, with like-for-like sales growth in Destination and Premium pubs of 4.1% for the five weeks to 10 May and 5.4% for the year-to-date. Taverns like-for-like sales growth of 3% and 3.7% was achieved for the same periods respectively. Leased profits have grown by an estimated 5% in the last five weeks, and in brewing, ale volumes are up 6%.
Analysts
A note from N+1 Singer issued a Buy recommendation for Marston’s at a Target Price of 163p.
It said: “A stronger than anticipated H1 outcome this morning with PBT +9.4% to £29.0m vs. our £28.5m – so a 2% beat. This fed through to EPS growth of 10.8%. Crucially after adjusting out the large tenancy divestment in Q1, underlying PBT growth was >15% we understand. The DPS has been lifted by 4.3% to 4.1p.
“EBIT growth in the dominant managed division (Destination & Premium) was 18.2%. The all-important LFL metric for H1 was a much stronger than anticipated 5.7%, implying an acceleration to effectively 7.9% over the last 11 weeks of H1. Note, the H1 comp was a weak 0%. Progress across the rest of the activities appears to be solid also, with Taverns EBIT +3% on a LFL basis, Leased LFL +3% and Brewing EBIT +4% on 3% sales growth.
“Commentary on current trading is much more positive than we anticipated. LFL’s in the managed division are cited at +4.1%, which against a +6% comp is clearly impressive. Notably, the April showing was +5.5%, comfortably ahead of the Coffer Peach showing of +4.4%. Trading across the other 3 categories is equally strong with Taverns LFL’s at +3%, Leased profit +5% and Brewing sales +6%.
“Given the 33/67 H1 PBT split, we opt to keep forecasts unchanged. Whilst we see upside risk we are mindful of strong H2 comps (hot summer last year) and the possibility of an accelerated divestment programme mitigating against an upgrade. The key to the investment case is however the expectation of double-digit EPS growth over FY15 and FY16 as the benefits of strategic restructuring / new build investment feed through.
“We currently have a 12m TP of 163p based on a blended FY15 P/E of 13x and 9.5x EV/EBITDA.
“We continue to advocate the strategic aligning of the business towards higher quality earnings with a view to lifting ROCE and EPS growth from next year onwards. The tenor of today’s interims is supportive of our Conviction Buy.”
