London office workers in search of after work drinks, and increasingly food, have long been a key market for pub companies hoping to tempt commuters with the promise of a pleasant hour in congenial company before catching the 7:10 to Godalming. Location, a strong brand and decent beer are key requirements in a competitive market, and Fuller, Smith & Turner (FSTA) has all of these qualities in a pub estate that lies within easy walking distance for most of the capital's affluent inhabitants. That combination of factors means we view the shares as a core leisure sector holding, and the group should continue to build on solid and sustainable growth record, which includes a near 50 per cent increase in underlying EPS over the past five years and 40 per cent dividend growth.
- Robust like-for-like sales growth
- Acquisitions coming onstream
- Excellent pub locations
- Sound balance sheet
- London prices are a problem
- Capital-intensive brewing business
Fuller's position at the high-end of London's competitive leisure market is fundamentally down to the prime location of its major premises and the recent results emphasised the basic quality of its overall pub estate. Like-for-like sales were up by 2.1 per cent in its 177 managed pubs and hotels, which account for 48 per cent of underlying operating profits. Meanwhile, like-for-like profits at the tenanted division, which accounts for 30 per cent of earnings, rose 1 per cent. Progress has picked up so far this year, with managed pubs and hotels returning like-for-like sales growth of 7 per cent in the nine weeks to the beginning of June. That result is all the more impressive given that last year pub companies were stocking up on beer to coincide with the Jubilee celebrations.
Being so London-focused is a disadvantage when it comes to expansion, though, due to the prohibitive cost of prime central London property. Fuller's strategy has seen it broaden its regional exposure. Fuller's 2011-12 acquisition splurge of over 30 pubs, plus the four purchased last financial year, include may premises in pleasant market towns in the south east and along the M4 corridor. In short, the company is sticking to areas where the bulk of the UK's economic growth is found. In addition, it is opening pubs near major transport hubs such as a new premises at Heathrow's terminal 2 and Parcel Yard opposite King's Cross.
FULLER, SMITH & TURNER | ||||
|---|---|---|---|---|
| ORD PRICE: | 915p | MARKET VALUE: | £510m | |
| TOUCH: | 900-920p | 12-MONTH HIGH: | 915p | LOW: 685p |
| FWD DIVIDEND YIELD: | 1.7% | FWD PE RATIO: | 20 | |
| NET ASSET VALUE: | 466p | NET DEBT: | 52% | |
| Year to 30 Mar | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 242 | 29.3 | 36.7 | 11.8 |
| 2012 | 253 | 30.3 | 39.3 | 12.6 |
| 2013 | 272 | 31.7 | 42.7 | 13.7 |
| 2014** | 285 | 32.5 | 43.5 | 14.4 |
| 2015** | 294 | 33.8 | 45.9 | 15.1 |
| % change | +3 | +4 | +6 | +5 |
Normal market size: 300 Matched bargain trading Beta:-0.15 *Underlying PBT and EPS **Numis Securities' forecasts | ||||
Investors can also trust that Fuller's won't risk its balance sheet unnecessarily. The company was implicitly criticised during the credit boom for its conservatism in shying away from buying up pubs as they came up for sale unless the price was judged to be right. That strategy now looks prescient given the depths to which Enterprise Inns and Punch Taverns fell after betting the house on helter-skelter growth. Fuller's net debt to cash profits ratio is just 2.6, compared with close to eight for some of the more heavily indebted pubcos. Numis analysts forecast that the ratio will fall to just 1.9 times cash profits by 2015, highlighting the potential for pub acquisitions.
The bear points with Fuller's are largely macro-economic, for example, it may struggle to expand at a time when London prices guarantee that new pubs achieve a low yield in relation to other types of property, particularly residential, which is only partly addressed by its commuter belt expansion policy. Secondly, the brewery business, though well-positioned and profitable, accounting for 22 per cent of the total, is operating in a beer market that has been in decline for many years.
