The Royal Bank of Scotland has recommended a Buy rating for Marston’s after being impressed by the brewer and pub operator’s “keep it simple “ strategy, which the bank says suits the current environment.
The bank, which started coverage with a 135p price target, said that it anticipated that Marston’s valuation multiples will rise to reflect consistent delivery of its strategy, which includes clear roll out, dividend and balance sheet targets.
RBS analyst James Wheatcroft said: “Cash conservation is king, along with the twin ambitions of leverage reduction and self-funded investment in high-growth areas. We do not expect acquisitions, especially since few distressed opportunities seem readily available.”
Wheatcroft said he believed the worst of the downward pressure on returns had abated and argued that returns for the company are just starting to show a sustained and positive upward trend.
He said: “The smoking ban and recession undermined returns from 2008, but we believe that recent capital investment has rekindled a positive returns trend. In absolute terms, however, overall investment returns appear low.”
Wheatcroft said that despite the key attraction of chunky cash flow, a brewing exit is currently unlikely to be fulfilled at an attractive price.
He added: “Vertical integration works and remains appropriate (for now)
In a world where vertical integration is increasingly rare, integrated pub retailing and brewing stands out. We examine the rationale for vertical integration and conclude that the benefits outweigh the shortcomings, for now.”
The analyst believes that company’s valuation should improve as strategy is consistently delivered.
He said: “We target modest EPS growth over the next three years driven by tenanted pub estate stabilisation and a growing proportion of new builds among managed pubs as a result of the roll-out programme. Our sum-of-the-parts (128p) and DCF (144p) analysis suggest valuations well above the current share price. We believe that a 12% free cash flow yield in FY11F, rising to 12.6% in FY12F, is eye-catching.”
