High-yield Marston's primed for growth

Announcing half-year figures earlier this month, Marston's suggest chief executive Ralph Findlay said the group's 'F-Plan' - focused on families, food, females and 40-somethings - is providing strong foundations for future growth. Marston's has spent the last two years re-evaluating the estate and converting many leased and tenanted pubs to its managed or franchised models. Any properties not up to scratch have been siphoned off, including 65 pubs in the first half, which fetched £26m.

The results look impressive. While £3m in lost profits from pub disposals and a £2m pension charge held back reported figures for the first half, on an underlying basis a 3 per cent rise in sales to £384m fed through to a 15 per cent rise in pre-tax profit. The small top-line improvement was amplified by the gearing effect caused by Marston's large but stable £36.9m debt financing charge. While net debt is high at £1.2bn, this is secured on a favourable, long-term basis and underpinned by £2bn-worth of property. Marston's estate was revalued upwards by £54m in the first half, including a 40 per cent uplift in the value of new-build pubs compared with their build costs.

Mr Findlay says the strong underlying progress reflects the group's continued reinvestment in the existing estate, constant improvements to the product offering and a steady string of new openings focused on new-build, premium and destination pubs. This year the group wants to add 25 pub-restaurants to its estate. Most will fall into its 380-pub 'destination and premium' division of high-turnover, managed pubs focused on family dining, which boast a food sales mix of more than 50 per cent. This division's underlying operating profit rose 10.5 per cent in the first half to £31.6m.

The 900-strong 'taverns' division, meanwhile, has been benefiting from the sale of underperforming pubs and the conversion of tenant agreements to franchise agreements. While disposals meant overall first-half operating profit was slightly down, profit per pub was up 19 per cent. The plan is to have 85 per cent of the estate internally managed or on franchise agreements by 2016 compared with 76 per cent now.

This is important because of incoming Market Rent Only (MRO) legislation that allows tenants to go 'free of tie', meaning they no longer need to purchase beer and other supplies from their parent company. But the government is excluding franchisees from the new law, so Marston's won't face losing a significant amount of revenue. Out of more than 1,600 sites, only 343 sit in the 'leased' division and Marston's already offers these licencees free-of-tie agreements. In the first-half, average profit per leased pub grew 4 per cent.

Marston's is also growing accommodation revenues by opening 'lodges' adjacent to its pubs and restaurants. In the first half of the year, the group opened new lodges in Dunbar and in Balloch, Loch Lomand. Another is expected in Whitby in the second half. First half like-for-like room sales grew 4.3 per cent.

Acquisitions are also playing a part in the growth story. Marston's has just bought the trading operations of Thwaites' beer division - including the Lancaster Bomber and Wainwright brands - for £25m, adding to its Brewing division's growing portfolio of premium ale brands.