Marston's: more bitter than mild

The UK's economy may be out of recession, but the strength of recovery can hardly be described as robust. The Bank of England said in its Inflation Report this month that the outlook for economic growth had weakened since its previous report in May; while the government's determination to take the largest possible axe to public spending adds to uncertainty. So, with recovery far from secure and with the likelihood that unemployment will rise as the public sector is dramatically scaled back, then most consumer-facing business could be in for a tough time. From the pubs operators, Marston's looks especially exposed.

The group reported a mixed performance earlier this month. True, management said that like-for-like sales in the managed estate - which includes the Pitcher & Piano, Milestone and Two for One chains - had grown 1.7 per cent year on year in the 43 weeks to end-July, with food sales up by a decent 2.5 per cent. But that was helped by favourable weather and the impact of the World Cup - one-off boosts. With the price of a pint likely to rise on the back of January's impending VAT hike, as well as from rising costs as the impact of eastern Europe's poor barley harvest feeds through, then maintaining that performance could prove challenging.

What's more, Marston's brewing volumes were flat in the period; admittedly, though, that is a better outcome than was achieved in the UK beer market as a whole, which declined around 6 per cent. And Marston's tenanted business continues to struggle, with like-for-like profits there down 4 per cent in the 43-week period. Marston's bosses don't sound too confident about the outlook, either. "Following the emergency Budget in June, we remain cautious about the consequential impact on consumer confidence," they said last month.

It doesn't help that the group is carrying a hefty £1.1bn debt pile. That's double the market value of the equity and represents about six times broker Numis Securities' estimate of full-year cash profits - the ratio is nearer three times, for example, at price-conscious rival JD Wetherspoon.

Yet Marston's remains focused on expansion. Accordingly, most of the £176m it raised from a rights issue in July 2009 is being used to bolster the pubs estate. Management hopes to open 15 new sites in the current financial year and plans to open 20 new pub-restaurants in 2010-11. Admittedly, given today's still weakened property conditions, Marston's should be able to snap up sites relatively cheaply. But, with consumer conditions still looking so uncertain, then such bold expansion also represents a gamble.

Still, the prospective dividend of over 6 per cent on the shares, based on full-year estimates from broker Numis Securities, certainly looks tasty. But even that is a tainted a little by the fact that the dividend has been substantially cut since 2007-08's 9.5p-a-share payout. Moreover, Numis expects the dividend to be cut next year and remain flat in 2010-11 at 5.8p a share. And, after adjusting for last year's impairment-related exceptional items, Numis expects pre-tax profits to rise by a thin-looking 3 per cent in the year to end-September 2010.