Interactive Investor

Marston's back to summer highs

26th November 2015 17:39

Harriet Mann from interactive investor

With a three-year transformation programme drawing to a close, Marston's has emerged as a top quality pub and restaurant chain. With a stronger portfolio, profits are up across the group, and while there's still work to be done, the City is getting excited.

Thanks to more rapid profit growth in the second half, adjusted full-year pre-tax profit increased 10% to £91.5 million, giving earnings per share (EPS) of 12.9p.

Despite disposals of lower-end pubs, underlying operating profit jumped 6% to £165.4 million. In fact, average profit per pub has risen 40% since 2012.

Selling 117 pubs raised £70 million and operating cash flow jumped by just under £35 million to £162.3 million. Up 5%, the 4.5p dividend is covered 1.8 times.

Marston's, which owns the popular Pitcher & Piano chain, has made big changes in recent years, focusing on the quality of its estate, brands and formats - and price. Capitalising on the insatiable British trend of eating out, 25 new pub restaurants were launched this year, and, after disposals, Marston's has reduced its estate from 2,050 to 1,600 core pubs.

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Its leased businesses have generated like-for-like profit and rental growth and the average profit per pub rose 15%. Trading in the new financial year has started well, too - around 20 new build pub launches are in the diary for 2016 and a focus on premium and craft beer is expected to drive profit growth.

And innovation is paying off. Over 20,000 Hobgoblin Gold barrels have been sold since their launch, many pubs now have Pizza Kitchens - as well as burrito bars - and its brands are outperforming the market, with volume growth of 15%. The National Living Wage will not damage business, either.

"As second-half 2015's 15% increase in profit before tax (PBT) indicates, Marston's is generating strong organic growth," says Numis analyst Douglas Jack. 

"Even on estimates of PBT growth slowing to 7% pa, we estimate that EBITDA growth/dividends should drive a 26% equity return over the next two years if the 10x EV/EBITDA rating holds."

He reckons double-digit growth will take sales to £941.2 million in 2016, with pre-tax profit jumping 8% to £99 million. Forecast EPS of 13.7p puts the shares on a forward price/earnings multiple of 12 times.

"We expect cash-flow to be neutral and net debt/EBITDA to fall by 0.3x, despite the progressive dividend and strong expansion plans," he added.

The shares rose 6% to 169p Thursday, back to levels last seen in June and up from an August low of 143p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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