Stockwatch: A quality tuck-away for uncertain times

Is there further upside for Young's? Amid the frenzy for Trump-related themes it's easy to overlook a very respectable set of interims from this AIM-listed pubs-with-hotels group, which oddly retains a "brewery" title despite selling such interests five-10 years ago. With a southern England focus, the group remains a defensive tuck-away - a quality stock to utilise this market's inheritance tax breaks.

The table (below) shows a very high price/earnings (PE) multiple relative to earnings growth and a scant 1.4% yield. However, while the annual average PE has ranged over 20 times in past years, the share price rise has been consistently exceeded by growth in net tangible assets per share.

It's hard to find another stock whose long-term rise is backed with a "margin of safety" by way of discount to net tangible assets.

Stockmarket volatility aside, in terms of "worth to a private owner" - another value-investing benchmark - it's highly unlikely Young's would sell for less than its 1,475p net tangible assets per share. It would need a wider crash in asset values to undermine this.

Young's strong trend of capital expenditure per share relative to cash flow per share reflects the extent of investment to grow in both assets and earnings, hence a low yield in context.

Latest interims beat forecasts

Results for the six months to 26 September reflect sound all-round organic growth: with no big amortisation charges to dent an 11.6% rise in statutory profit to £22.1 million, adjusted pre-tax profit rose 8.7% to £22.4 million on revenue up 7.7% to £136 million. This was achieved despite the comparative period benefiting from the Rugby World Cup.

Adjusting for minor exceptional items, earnings per share (EPS) increased 8.1% to 36.3p, or in statutory terms by 17.1% to 38.4p, with the interim dividend up 6.0p to 8.88p per share.

The CEO cites cost pressures, including a jump in business rates amounting to £1.8 million annuallyThis was based on continuing operations and out-strips rivals such as JD Wetherspoon and Greene King. Managed pub revenue rose 5.4% for a fifth consecutive summer of growth over 5%, with the operating margin maintained despite introduction of the National Living Wage.

Operating cash flow rose 5.8% driven mainly by operating profit growth, supporting £20.4 million investment during the period, including the acquisitions of two pubs in Bermondsey and the Cotswolds.

Net debt was reduced by £2.9 million to £127.3 million for gearing of 28%, and the interim dividend rose 6% to 8.88p, putting Young's on course for a 20th consecutive year of dividend growth.

Meanwhile, forecasts look cautious for the current and 2017/18 year based on numbers from Young's broker, Panmure Gordon.

The chief executive does cite other cost pressures, in particular "an exceptionally high increase in business rates on a successful company like us" amounting to £1.8 million on the annual cost base.

Despite tough comparatives, total sales in the last 13 weeks were up by 4.8% and 3.0% like-for-like Falling bond yields also mean the pension fund deficit has jumped by £17.1 million to £23.4 million, and it intends to supplement cash contributions in years ahead to ensure proper funding.

But, taking into account such hurdles, it still looks possible for the group to achieve over £40 million annual profit. It's as if guidance has been conservative to reduce the risk of warning, but this doesn't square with the overall numbers/outlook.

Despite tough comparatives, total sales in the last 13 weeks were up by 4.8% and 3.0% on a like-for-like basis and, moreover, its pipeline of acquisitions looks "strong", with the Station Tavern in Cambridge just purchased and an exchange of contracts on another at Bristol.

Regarding general development, two pubs will be created in partnership with Berkeley Homes and the White Bear in Kennington has been transformed.

Brits still hungry in recession

Nobody knows the long-term effect of Brexit, either, although the 2008/09 recession showed people didn't compromise on going out.

A bear case implies professional jobs in the South are more exposed to a fall-out from Brexit in the years ahead, such that revenues go ex-growth, and warn that a downturn will undermine commercial property values.

It would also need a blow to British behaviour, though, to damage the social trend for eating/drinking out.

There's a 'Youngs on Tap' app to locate pubs, book tables, choose music and pay/split billsYoung's has just cited drink sales up 8.4% overall, or 6.4% like-for-like, boosted by wine up 9.1% helped a new "best in class" wines range. Food sales rose 6.9% in total, 4.0% like-for-like, figures the supermarkets must envy.

Moreover, a circa-£250 million revenue group with operating margins in the mid-teens has more scope to roll out its formula relative to the likes of near £1 billion Wetherspoon's on a 6% margin.

Management has introduced the BurgerShack concept across 21 pubs and introduced a brunch offering to capitalise on the social trend for leisurely weekend breakfasts. Other initiatives include a "Youngs on Tap" app to locate pubs, book tables, choose music and pay/split bills.

Opening 12 individually designed, "boutique" bedrooms at Weybridge has increased room availability to 487 in the Hotels business; half of all rooms offered by the group are now at this standard. The overall occupancy rate is up 1.3% to 78.6% with revenue per available room steady at £63.80 versus the Rugby World Cup period.

Investment rationale intact

I've drawn attention to Young's at various times, from 600p in July 2012 to 1,125p in May 2015, due to its scope to expand as a moderate-sized, well-managed group compared to other mediocre pubs.

At 1,320p currently, the shares trade at a 10% discount to tangible net assetsRecalling the 2015 article, Young's easily beat the consensus for £31.7 million normalised pre-tax profit in its year to end-March 2016, achieving £34.9 million on REFS' normalised basis and £35.4 million on the company's measure.

Also, 18 months ago the stock traded over 20 times earnings but still delivered 18% upside in market value and 12% in tangible net asset value.

Yes, more challenges are manifest now, but at 1,320p currently the shares trade at a 10% discount to tangible net assets and, barring no slump, their risk/reward profile remains favourable.

A quality pick, especially for inheritance tax-minded portfolios.

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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.