The brewer and pub operator Marston’s (LSE:MARS), it is widely believed, will recover quickly once the Covid restrictions are lifted. Some analysts are even suggesting that Marston’s shares could double in value, based on the optimism surrounding the upcoming roll-out of the vaccine, the continued recovery in share price for UK small and mid-cap companies and the pent up demand among the public for a return to the pub.
Investors have had good reason to avoid Marston’s over the years, or is the stock undervalued? A look at the Small Cap and All-Share indexes shows Marston’s has underperformed ever since the Brexit referendum vote in 2016, though staging something of a recovery through 2019. Marston’s shares closed trading on December 4 at £68.95, which is 47.2% down on the year but 34.4% up over the past three months.
Too much debt on the books for Marston’s?
Marston’s balance sheet features a scary debt to equity ratio of 178%, though on a downward trend from 221.6% five years ago, and an operating cash flow only covering about 14% of the debt. Investors looking for a quality company will note that Marston’s return on capital employed last year was a poor 5.4%, down on the 6.9% three years ago.
Marston’s is not profitable either, though it is forecast to become profitable over the next three years. Analysts are forecasting an annual earnings growth of 80.7%, well above the industry’s 65.1% and the UK market’s 26.2%.
For Marston’s, as for all pub groups, the lockdown came at a time when they were already struggling to cut costs amid falling revenues. Marston’s lost £40m in March, mitigated only by a 23% jump in off-trade volumes, as customers turned to supermarkets for their beer. Underlying pre-tax profit for the six months to the end of March fell to £9.4m from £34.2m a year earlier.
Carlsberg joint venture coming online
Faced with a collapsing share price, Marston’s had to ask for a waiver from some of its noteholders and announce plans to cut more than 2,000 jobs. On the positive side, Marston’s joint venture with Carlsberg UK, the Carlsberg Marston’s Brewing Co, came on stream at the end of October, a deal that sees Marston’s adding to its range all the Carlsberg brands, including those brewed under licence, such as San Miguel, Estrella Damm and Kirin.
The deal brought Marston’s a £273m windfall, which it plans to use to cut its debt pile, while news that the joint venture had received regulatory approval caused Marston’s shares to jump 20%.
Marston’s is well positioned in the market, with a balanced business model that includes pubs, accommodation and brewing businesses. Apart from its own beers, it has a portfolio of brands (eg. Ringwood, Wychwood, Jennings, Thwaites and Banks’s) that gives it 14% of the total UK ale market, with about a quarter of the premium ale market. It has also secured important distribution deals with all the main supermarkets, such as Sainsbury’s, Tesco, Lidl and Aldi.
Last year, CEO Ralph Findlay stated his principal focus was to reduce net debt by £200m by 2023, and to build a business that is cash generative after dividends and capital expenditure. If the current strategy remains on track, Marston’s may well become the high quality company that investors are looking for. Further clues may be found when the company releases its full year results on December 10.
