Disposals help Marston's with debt reduction

Marston’s (MARS) pivot to a pre-tax negative was driven by a £35mn loss on interest rate swap movements. But there was some uplifting news here on sales and margins, as the pub operator pointed to “encouraging” demand from punters.

Chief executive Andrew Andrea told Investors’ Chronicle that customers have been “willing to spend more, with a shift towards premium products”.

Like-for-like (LFL) sales rose by 10.7 per cent in the half and were up by 17.9 per cent against 2020. Post-period, however, the growth rate fell back to 7.9 per cent.

An underlying operating margin of 10.6 per cent was down by just 20 basis points against last year, a solid result given the higher energy costs faced by the business.

And net debt, which has historically risen in the first half at Marston’s, fell by £12mn after £24mn-worth of strategic disposals. Management anticipates £50mn to £60mn-worth of disposals for the full year. But there remains a big debt pile to tackle, as the company aims to get this below £1bn (excluding lease liabilities) by 2026.

Almost half of the estate is now freehold, and management plans to increase the ratio, with a trial of franchised food-led pubs being launched. Broker Peel Hunt said that franchise “is an optimal operating model [for the company], combining the benefits of high incentivisation and cost efficiency”.

J.P. Morgan Cazenove analysts said that “a pub estate with mediocre LFL sales in recent years, combined with still-high leverage, makes us cautious despite attractive valuation metrics.” The valuation is certainly attractive – City analysts rate the shares at just five times forward earnings, according to consensus forecasts on FactSet, notably below the five-year average of 13 times. However, you could just as easily argue that the hefty discount to NAV shows that the market has little interest in the shares. We stick where we are for now. Hold.

Last IC view: Hold, 39p, 06 Dec 2022