Marston's preliminary results mark the successful completion of its three-year transformation programme. This included a comprehensive reorganisation of the pub estate with a 25% overall reduction and a 37% increase in average profit per pub to £100k. But progress is far from over. The company is in a stable state, and able and willing to operate the levers of future growth. The steady improvement in return on capital may not be the most dramatic number compared with the double-digit earnings growth in these results, but holds the key to the assurance investors can place in the prospect of continued income growth.
Final results were strong, with underlying revenue up 7% to £845.5m, operating profit up 6% to £165.4m, PBT up 10% to £91.5m helped by interest reductions, and EPS up 10% to 12.9p. Leverage reduced 0.3x to 5.1x. Performance was well spread across the estate, with the two main arms Destination and Premium, and Taverns, posting like-for-like sales growth of 1.8% and 2.0%, and operating margin up 0.3% and 1.3% respectively. The brewing division, which accounts for 11% of operating profit but has an organic link to the pub estate and the culture of Marston's, grew profits 19%, boosted by the acquisition of the Thwaites beer business. Net debt of £1,245m represents 59% loan to value on the 96% freehold estate. The company reports that the current year has started well.
Marston’s has been active in adapting its offer to the fast-changing pub market, and is well prepared for the future, with investment on new-build pubs targeted to run at £60-70m pa (at a freehold return of 13-15%) and continued roll-out of its highcontrol franchise model, which increased by 80 to 550 pubs out of the Taverns total of 859 (vs Destination and Premium 397, and Leased 341). As a result of its effective estate management and trading actions, its cash return on investment (pre-tax) is slowly but surely cranking up from 10.6% in 2012 to 10.8% now.
On an FY16 consensus P/E of 12.3x and prospective yield of 4.3% (1.8x covered), this is a company that investors can rely on to continue to adapt and improve its performance and returns. As a consequence, we believe that fair reliance can be placed on the prospect of continuing income growth.