M&C Report takes a closer look at the full-year results for 5 October for Marston’s and talks to Peter Dalzell, managing director of Marston’s Inns and Taverns.
Package disposal
Marston’s this morning announced that it had disposed of 202 pubs for £90m to NewRiver Retail Limited, a specialist REIT focused on the UK food and value retail sector, which plans to convert them to alternative use, primarily into food convenience stores and restaurants.
Dalzell said the pubs are from the “third quartile” of the estate, typically taking between £5,000 and £7,000 per week. “These aren’t bottom end, these aren’t the top end. These are pubs that we don’t see a long term future for but they have performed ok.” He said bottom end disposals are better carried out by single site sales, whereas a package deal such as this “works well for pubs of better quality”.
The pubs are split evenly across the country, Dalzell said.
Other disposals
Marston’s reiterated its plan to generate between £60m and £70m from disposals in 2014 and 2015 - chief executive Ralph Findlay previously told M&C Report that this could equate to c400 pubs over the two year period. During the year it generated £46.2m from the sale of 130 pubs and other assets.
Tenanted conversions
Marston’s now has more franchise pubs (603) than tenancies (578) and the company said over the next two to three years it expects most of its Taverns community pubs to operate under franchise. Asked when he expects its tenancies to disappear from the estate, Dalzell said two to three years, “possibly longer”. “That’s the direction of travel. It’s a consistent view we’ve had for two to three years.”
Lodges
Marston’s has a pipeline of about 12 or 14 lodges, said Dalzell. It currently operates 12 sites that are co-located with national lodge operators, and in 2013 it opened three lodges, in Aberystwyth, Chepstow and Redditch. Dalzell said he imagines Marston’s would open two or three a year. “We’re really happy with the lodge performance,” he stated. “We think the lodge is a really good ancillary business to the pub business - we do see them a joint business.” Marston’s currently operates accommodation in c50 pubs.
Managed menus
Average prices have risen by 30p in the year to £6.50, said Dalzell, who stressed that customers still view this price point as good value for money. “We feel the consumer market is pretty tough. People are still getting a lot of bills to pay,” he said.
Dalzell highlighted the “Americanisation” of its menus, with more items such as hotdogs, as well as more “freshness” across the board. “[Customers] really are looking for something different, something exciting. People want more world cuisine. In the pub environment they want that choice. They expect to see a full portfolio of items on the menu.”
Managed: food sales
Marston’s served more than 30m meals in its managed pubs, and in its Destination pubs, food is the primary driver for around 80% of customer visits. “We consistently outperformed the Peach Market Tracker in 2013 and have increased our share of the eating-out market,” the company said. “The appeal of our pubs to families is strong and increasing, demonstrated by a 19% increase in kids’ meals served in the year.”
Starters, desserts, coffee
Sales of these lines increased by double digits in the year. Marston’s said this was helped by the introduction of table service at all its Milestone and Two for One pubs, plus new retail technology such as hand-held tills.
Managed: newbuilds
Marston’s reiterated its plan to accelerate newbuild openings from 20-25 to 25-30 per year. It opened 22 in FY2013, including its first in Scotland, and over the past seven years has build more than 100. Since 2010 the developments have beaten target returns on capital of 16.5%, representing an investment multiple of 6x EBITDA. “This high return on capital has generated significant value for investors, demonstrated by the 2012 estate valuation of the new-build pubs which yielded an uplift of over 50% against build cost.”
Marston’s said 30% of its newbuilds are in the south, while there’s expected to be 25 Scottish outlets in the next five years.
Estate development
Marston’s outlined its vision for the estate by 2016. The number of managed sites would have grown from 349 to c430, with the Leased estate down from 385 to 320 and Taverns down from 1,316 to c800. Overall, the estate is expected to decline in number from 2,050 to c1,550.
Pitcher & Piano
The first new Pitcher & Piano opened in the summer in Hitchin, Hertfordshire, and it’s been “trading strongly”. “We will selectively seek to expand the estate as appropriate locations become available.” Food is “increasingly important” across the 20-strong brand and increased to 25% of sales. Average turnover is £26,000 per week. The plan is to grow the number of sites by one or two per year from 2015/2016.
Revere
Marston’s plans six more conversions to Revere, its unbranded premium concept, in 2014 after opening six last year. Two have already been converted in Marston’s current financial year.
Franchises
Marston’s said the post conversion profitability of its c600-strong franchised estate is strong with £1.5m profit growth achieved in 2013. “Licensee stability is high, at over 90%, and we receive more applicants for pubs operating under a franchise model than for those operating under traditional agreements: prospective licensees clearly value the benefits described above. Around 30% of applications are from people new to the pub sector.”
For the first time, in 2013 Marston’s extended the franchise model into 20 previously managed pubs, which are “achieving positive results”. Previously the model was only introduced to former tenanted sites.
Leases
Marston’s said the performance of its leased pubs, which number fewer than 400, has been “more robust than the sector generally”. The company said the reasons include: a consistent approach to setting fair, sustainable rents over many years; transparency in dealing with licensees; assistance for licensees from good business development managers, and wide-ranging support in terms of promotions, cost management, advice and online facilities.
Sector performance breakdown
Destination and Premium (349 sites, includes 138 Two For Ones, 82 Milestones, 29 Pitcher & Pianos and six Revere venues). Revenue grew 14.1% to £349.2m, mainly reflecting the performance of its newbuilds and the benefit of the 53rd week. Average profit per pub increased to £207k, up 11.9%. Total like-for-like sales were 2.2% above last year, with growth in H2 of 4.1%. Like-for-like food sales were up by 3.9% through a combination of volume growth and increased sales of starters, desserts and coffee which contributed to a higher spend per head. In Destination pubs, food now accounts for 56% of total sales (2012: 54%) and in Premium pubs and bars food is 25% of sales (2012: 24%). Like-for-like wet sales increased by 0.2%. “We continue to see growth in more premium products, with premium cask ale volumes up 9% and premium lager up 11%. Wine sales increased by 13% and now account for 24% of drinks sales (2012: 22%). We achieved a 1.5% improvement in operating margin through moderate price increases and tight cost control.”
Taverns (135 managed pubs, 603 franchises, 578 tenancies). Revenue in its community pub arm increased 3.8% to £250.8m, “reflecting the increased revenue contribution from more pubs operating under the franchise model”. Underlying operating profit fell 5.1% to £69.5m, “principally reflecting a significant level of disposals, poor weather in the first half year and a more subdued performance in our tenanted pubs in line with market trends”. Average profit per pub is in line with last year. In its managed and franchised pubs like-for-like sales were in line with last year and operating profits were up 3.7%, “reflecting the continued success of pubs operating under the franchise model”. Tenanted like-for-like operating profits fell 7.7% in the period, “an improvement on the decline in the first half, reflecting the continued challenges facing small wet-led tenanted pubs in the current market and representing a relatively subdued performance given the better weather in the second half year”. Operating margin was 2.6% below last year at 27.7%, primarily due to the conversion of pubs which were formerly tenanted to franchise models.
Leased (c400 sites). Revenue fell 4.6% to £55.6m, “principally reflecting lower volumes in line with the market”. Underlying operating profit of £26m was in line with last year. Average profit per pub increased by 2.1% to £67,000, and licensee stability remained high at 92%. “As with tenanted pubs, underlying measures of lessee ‘health’, including rent alleviations, improved during the financial year.” Operating margin was 2.2% above last year at 46.8%, “primarily due to a higher mix of rental income, and lower support costs”.
Brands: performance
Ale volumes grew 6% in the year in a market down 3% (premium cask: +4%, bottled ale, +19%, with market share of both up 1%). In the past five years volumes of its premium ales have increased by 25%, and 42% in the off-trade. “We are leaders in premium cask ale, with a market share of 18%, and in bottled ale with a share of 24%.” Revenue in the division grew 12% to £127.3 with underlying operating profit up 3% to £16.9m. Hobgoblin sales increased 16% and it’s now the company’s largest brand.
In the independent free trade, its account base increased 3% to more than 3,800 customers, and premium ale sales to this sector increased 6%. In the take home market volumes grew 18%. Operating margin was down versus last year at 13.3%, “reflecting the higher proportion of volume through the off-trade, which commands a lower margin percentage”.
Capex
Capex in the year was £150.8m (2012: £129.8m), which included the construction of 22 pub restaurants. Marston’s said the main reasons were an additional £13.6m on newbuilds and £7m in a new bottling line. It expects capex to be c£140m in 2014, including c£80 building pub restaurants.
Bank facilities and financing
At 5 October the group had a £257.5m bank facility to May 2016, and the amount drawn down was £191m. Subsequent to the year end, this facility has been extended to November 2018 on “attractive terms”. During the period, the group entered into three new lease financing arrangements which have a net value of £108.6m as at 5 October 2013. This financing is a form of sale and leaseback agreement whereby the freehold reverts to the group at the end of the term at nil cost, consistent with its preference for predominantly freehold asset tenure. The agreements range from 35 to 40 years and provide the company with an extended debt maturity profile at attractive rates of interest.
Current trading
Marston’s said: “We have seen an encouraging start to the new financial year. In Destination and Premium, like-for-like sales in the seven weeks to 23 November increased by 3.1% with food sales growth of 4.6% and wet sales up by 1.0%. We have opened seven new pub-restaurants to date. In Taverns, like-for-like sales in managed and franchised pubs are up 2.1% and tenanted profits are in line with expectations. In Leased pubs profits are in line with last year and in Brewing our beer brands are performing in line with our expectations.”
Analysts’ views
Simon French at Panmure Gordon reiterated his Hold recommendation but increased its Target Price from 135p to 150p.
“Marston’s has announced FY 2013A results in line with expectations reporting £88.4m PBT compared to consensus of £88.6m,” French said.
“The final dividend has been increased 5% to 4.1p, in line with market expectations. Current trading is a touch stronger than anticipated with LFL sales growth of 3.1% in Destination & Premium pubs, compared to our 2.5% forecast. The group has also announced the disposal of 202 tenanted and leased pubs for £90m (a 7.6x EBITDA multiple) to New River Retail, a REIT. Marston’s will manage these pubs for up to five years prior to their conversion to alternative use.
“These are solid results, accompanied by a strategic disposal with proceeds used to reduce expensive debt. However earnings will be diluted (by c4%) in the short-term and the valuation increase to recognise the higher quality earnings stream.”
A note from N+1 Singer has a Buy recommendation at a Target Price of 157p.
The note said: “In our view the 2013 results provide further evidence of a management team making sound strategic progress to improve the quality of earnings. This journey has another 2-3 years to play out but is clearly accelerating.
“However, we feel there is strong momentum to recycle free cashflow and disposal proceeds towards expansion of the managed division and sustain LFL growth. We expect the pro-active strategic steps being taken to ultimately be well rewarded by the market and for it to look through the ST dilution. Commentary on current trading should help sentiment also. The shares are well supported by an attractive 4% dividend yield. “
