Marston's for cheap growth and high income

While a recent slew of sales of non-core pubs is expected to result in flat earnings this year, the move provides the opportunity to significantly boost returns by focusing the pub group on its strongly performing managed estate and its innovative franchise pubs. Indeed, the plan is for 85 per cent of profits to be generated from such pubs in coming years.

According to chief executive Ralph Findlay, Marston’s success in rejuvenating its estate since the credit crunch can be attributed to paying close attention to the changing nature of the British consumer. He calls it the 'F-Plan': focusing on families, females, forty-somethings and - most importantly - food. Traditionally, pubs focused on drinks sales because it was a higher-margin business. But Mr Findlay says that has changed. Britain’s average consumer, he says, is looking for the most "bang for their buck" and wants food to play a part in weekly trips to the pub. Mr Findlay also points out many household spending decisions are made by females and described them as a ‘prime customer target’. Much of the pub sector is now slowly catching on to this trend, but Marston's has a head start on its rivals.

Marston's seemed to realise the pub landscape and the clientele was changing as early as 2009. Since then, the group has built over 100 'family-friendly' pubs, investing more than £250m in new sites. And prescience of the move was illustrated last year by the British Beer & Pub Association’s annual pub-running guide entitled which found that pubs with higher dry sales (food) are now better able to boost profitability, as food margins now range from 56 to 61 per cent, compared to drinks margins ranging from 49 to 54 per cent. What's more, the same report showed the highest level of gross profit was achieved by rural-destination pubs and food-led pubs, which are a particular focus for Marston's. Its estate is mostly regional and underlying operating profit at its destination and premium sites - including branded Pitcher & Piano chain - grew 18 per cent in the first half of 2014. This was down to an increased spend per head as well as more customers.

The strong contribution from these 356 managed pubs, accounting for almost two-fifths of underlying profit, helped the group to beat most brokers' forecasts in the first six months of the financial year. Underlying revenue was up 4.5 per and underlying EPS rose 11 per cent to 4.1p, but forecasts have not been upgraded for now. The ongoing conversion of tenanted pubs to the group's innovative franchise model (currently accounting for 545 of the group's 1,078 'Tavern' pubs) has also helped overall performance and has helped limit risks.

However, Marston’s - along with much of the sector - carries a hefty debt pile and has made reducing it a major strategic objective. The medium-term target is to bring the ratio of debt to cash profits down to 5 times and the ongoing disposal programme, which generated £116m in the first half, will help. Importantly, though, expansion plans are also still high on the agenda. The 2009 new-build programme doesn’t look set to slow: this year the group is on track to open 27 new family-focused pub restaurants, 11 of which already opened their doors in the first half.