Ever Fuller

The recession has been tough for pub companies, but looking at the growth achieved by Fuller Smith and Turner throughout this tumultuous period you’d be forgiven for thinking otherwise.

Over the last five years the Chiswick-based brewer and pub operator has has grown underlying pre-tax profits by 53 per cent, adjusted EPS have risen 65 per cent, and a 50-plus-year record of dividend growth has remained unbroken with the payout rising from 7.4p in 2005 to 11p last year.

The secret of this success isn’t rocket science. The company has a clear focus on running excellent pubs, brewing excellent beer and doing the basics well. The fact that the Fuller and Turner family own a substantial amount of the company and the executive team is led by chairman Michael Turner may go some way towards explaining why management is so good at playing the long game and creating value for shareholders.

Shrewd, value-accruing management is evident in many areas of the business such as the decision not to fix the interest paid on debt following a string of acquisitions a year ago. This meant the company experienced a 13 per cent fall in interest payments last year despite a 14 per cent increase in net debt. Another example of management's ability to get more bang for its buck was the decision to up marketing spend last year when advertising costs were very low.

However, the shrewdest move was the acquisition of 11 iconic London pubs during the depth of the credit crisis. The bulk of the pay-off from these canny acquisitions came through in the company's most recent set of results in the form of a 17 per cent surge in both adjusted profits before tax and earnings per share.

Even after the acquisitions, the balance sheet looks remarkably robust. Net debt represents just 2.5 times cash profits, which is low by industry standards. And a new £100m replacement five-year bank facility has recently been agreed, which gives scope for further acquisitions, although the very best opportunities have probably already been had. It's worth noting that freehold property is not regularly revalued and is in the books at well below current market values. Broker KBC Peel Hunt estimates the company's true net asset value (NAV) is closer to 540p.

Fuller's own-managed pubs business, which includes 487 hotel rooms and accounts for almost half operating profit, has had an excellent recession, even without the pub purchase. The quality of the estate and its London focus has meant the division has substantially outperformed its peer group and recently it increased like-for-like sales by 3.5 per cent in the 10 weeks to 5 June. If a sustainable economic recovery sets in, the division’s hotel rooms, which currently contribute about 6 per cent of revenue, should help exaggerate the cyclical boost, although there is always a risk of a double-dip recession given the fragile nature of the economy.

Pubs rented to tenants have also shown noteworthy resilience compared with peers. In the financial year just ended this part of the business, which accounts for just under a third of profits, saw like-for-like profits down a modest 1 per cent. Meanwhile the brewing business also continues to outperform the wider market, in which volumes are declining, and the growing popularity of real ale among pub goers is a gift for the company.