Young's a premium buy

London-focused Young & Co's Brewery (YNGA) is positioned at the premium end of the market, with a well-invested, mainly freehold estate of prime pub properties. This clear focus has served the company well over the past two decades (see chart below). Indeed, the severe downturn that followed the credit crunch, which was a cataclysmic event for some rivals, registers as just a minor blip in the company's longer-term progress.

The industry is expected to face tough times once more in 2018, although not anything like on the scale of the credit crunch. Indeed, as pubs head into their half-year reporting season, the latest Peach Tracker – an aggregation of leisure industry trading data – forecasts falling like-for-like sales growth and contracting margins. Young's has bucked both these trends. Like-for-like sales in the six months to the end of September increased by 4.6 per cent at its managed pubs, with drink sales up 4.6 per cent, food sales 4.1 per cent ahead and revenue per available room from accommodation up 6.6 per cent. Meanwhile, like-for-like sales rose 1.6 per cent at tenanted locations.

The benefit of being at the high end of the pub market is demonstrated by Young's success at selling higher-margin products to its customers. During the first half sales of cocktails were up 56 per cent, rosé wine by 32 per cent and keg beers by 28 per cent. Overall, underlying first-half operating margin for the group rose from 18.5 per cent to 19.3 per cent.

Importantly, Young's keeps on investing in its estate to underpin its industry-leading performance. As well as investing £14.3m in its pubs over the half-year, the company has announced the purchase of the iconic Smiths of Smithfield, along with its sister site at Cannon Street. The acquisition prompted modest but useful EPS forecast upgrades for 2019 and 2020.

However, Young's cannot avoid increased costs from higher business rates, the national living wage and the apprenticeship levy, as well as Brexit uncertainty. Indeed, extra costs of £4m are expected to accumulate in the full year. Nevertheless, despite a forecast margin squeeze, the extent of top-line growth is expected to keep profits steady until cost pressures level out.