In many towns and villages, you’re likely to find a tired-looking building with boarded windows and dandelions sprouting up in front of the door threshold. Closer inspection will likely reveal that the forsaken building was once a pub.
According to the BBC, The Campaign for Real Ale (CAMRA) said there were 476 pub closures in Britain in the first six months of 2018. Pub industry figures show the rate of closures at 18 per week. CAMRA reckons the high cost of drinking out means more people are drinking at home, and pub businesses are struggling under a “triple whammy” of high beer duty, rapidly rising business rates, and high value-added tax (VAT). On top of that, 16-24 year-olds are less likely to drink than any other age group. So why would you want to invest in a firm such as Marston’s (LSE: MARS), which describes itself as a leading pub operator and independent brewer?
Out of favour
I think that’s a question that many investors have been asking themselves in recent years because, at the recent share price of 103p, the forward price-to-earnings ratio is just over seven for the trading year to September 2019, and the forward dividend yield sits a little over 7%. Marston’s looks cheap but, in fairness, earnings and the dividend have been stagnant for the past few years, so perhaps it should be.
Yet, there are signs that the business is showing resilience and flickering into life. Today’s full-year figures reveal that underlying revenue grew 15% year-on-year, profit before tax rose 4%, and earnings per share declined 2%. The directors held the total dividend for the year at last year’s level. Meanwhile, around 43% of underlying operating profit came from the firm’s Destination and Premium arm, which includes upmarket pubs, food service, and accommodation. The ‘wet-led’ Taverns division delivered 41% of operating profit, and 16% came from Brewing.
Underlying business performing well
Despite the difficult backdrop in the industry, the company declared it had achieved five consecutive years of like-for-like pub sales growth, and even opened 14 pub-restaurants and seven lodges during the period. There was also “strong growth” in Brewing, with total volume up 47% during the year, due mainly to a previous acquisition. The company said in the report it has “clear plans” to grow in the current trading year, which includes the establishment of 10 pub-restaurants and bars, and five lodges. The company also expects to acquire 15 pubs from Aprirose, and invest in a canning line in its Brewing division and a new distribution centre in Thurrock.
I think the growth in the Brewing division looks promising and it could expand to offset some of the more cyclical risks in the rest of the business. But all divisions seem to be doing quite well at the moment. Meanwhile, the company declared a net asset value of £1.51 per share, which arose because of the valuation of its property estate, and because of a £10m reduction in the pension funding deficit, down to £40m. I think the asset figure sits well against the share price and could be supportive. Suddenly, Marston’s looks in pretty good shape and maybe the shares are selling too cheap. Perhaps it’s time to take a chance with that fat dividend.