I bought into these in December last year, primarily for the yield, but also for the potential growth of one of the better companies in their sector.


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Marston's Fundamentals (MARS)

I went to the AGM today. Not much to report that isn't in the trading update.

In relation to LFL sales, the Chairman said it's a balancing act between increasing sales and increasing margins. They are focused far more on margin than increasing sales right now.

There was a question on the floor about growth markets and whether Marstons are missing out:
1. What plans do they have for zero alcohol beer? (which they already sell and brew)
2. what plans do they have for Marijuana sales given that this has now been legalised in Canada as this would be a natural fit with drinking, smoking and alcohol?

MARSTON’S Q1 CONFERENCE CALL:
Marston’s hosted a conference call following its update on trading to 19 January 2019 and our comments are set out below:
Trading:
• Says sales were ‘satisfactory’. This because margins are being held. Top line LfL sales are not up as much as some competitors.
• Cost mitigation targets are unchanged. MARS is in a slightly better position here as it has fewer units in London and certain city-centres than do some of its competitors.
• Will lower maintenance capex impact LfL sales? Understood but the new build pubs will need less attention & many of the disposals have been of units that require(d) more upkeep.
Balance Sheet & Debt:
• Why do this now? Uncertainty. This is worse than it was a year ago. Also, asked investors. The market has not been rewarding the previous policies over a sustained period of time.
• Group should enhance equity value by reducing debt. It will be clear that the co is not paying dividend out of debt.
• It is ‘prudent for debt reduction’ to take a greater precedence. Debt will be down £200m over the next four years with a held dividend.
• Debt should be ‘below 5x’ within the 5yrs under review.
• Sale & leaseback? Not likely to be any this FY.
• There will be reductions in the level of maintenance capex. The £25m reduction in new build means say 5 fewer new-build pubs and 3-4 pubs with lodges. There is still room for selective corporate activity.
• There are c100 pubs on the books at any one time that MARS is likely to be looking to sell.
• Pension benefits should be in the region of £5m p.a. post the group’s next triennial review
• The group is ‘looking at’ securitisation issues but, as the mark to market hit would be significant at present, this may only occur over time. Will move when the NPV is right.
• What EBITDA will be lost on the pubs to be sold? Perhaps £5m – but this will be mitigated by interest savings.
Langton Comment:
• Marston’s has updated further on its plans to cut debt by £200m over the next four years. The group confirms that it will hold its dividend at current levels.
• Trading is not easy, but Marston’s has a estate of well-managed and well-maintained, largely freehold properties. It is selling product that the consumer would like to buy at a price they are prepared to pay. Lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s is a major brewer and has a large wet-led element to its estate and is well-placed to grow and to create further value for its shareholders.

Result of AGM.

An ok trading update and the sooner the debt levels are reduced the better, if £80m/£90m can be achieved through property sales then the balance does not look too onerous. Having debt twice their market cap doesn't seem right even if they have an estate of freehold properties.

• Fuller, Smith & Turner is to sell its beer business to Asahi.
• The company says it has ‘entered into an agreement for the sale of its entire beer business to Asahi Europe Ltd…for an enterprise value of £250 million on a debt free, cash free basis.’

FSTA up 21% and would appear to suggest MARS deserves a re-rating.