Fuller’s, Marston’s and M&B: mixed results and prospects
Three very different companies and three very different sets of results and progress reported on 24 July. The improving economy may be helping, though England’s sporting woes (football and cricket) are not – let’s hope Glasgow and the Commonwealth Games lift everyone’s spirits – and drinking arms.
Fuller’s
Fuller, Smith & Turner P.L.C., the London brewer and premium pub company, issued its Interim Management Statement for the 16 week period from 30 March to 19 July 2014, reporting that trading has been strong across all divisions, with like for like sales in Managed Pubs and Hotels rising by 7.3% for the period and like for like profits in the Tenanted Division growing by 3%. Total beer and cider volumes in the Fuller’s Beer Company rose by 7%.
Net debt as at 28 June 2014 was £145.2m and net debt to EBITDA remained at 2.5 times.
During the period, the Company purchased a 51% stake in The Stable, a craft cider and pizza restaurant business, acquired The Bull Hotel in Bridport, Dorset and The Windmill in Portishead, near Bristol and agreed to acquire The Harp in Covent Garden. In addition, London’s Pride, the Company’s first airside pub at Heathrow Terminal 2, opened its doors for trading.
Simon Emeny, Chief Executive, commented:
“We’ve had a strong start to the new financial year with our core business performing well. We launched a number of new initiatives last year, particularly in the Beer Company, and these are beginning to bear fruit. In addition, we have an excellent pipeline of new openings – the three riverside pubs in Kew, Fulham and Greenwich will come on stream, a seventh Stable opens in Falmouth at the end of August and we will continue to look for new pub acquisitions that fit our style of operation. The year has started well and I look forward to building on this early progress.”
Douglas Jack of Numis commented:
“Managed pub/hotel LFL sales are up 7.3% after 16 weeks, maintaining the strong momentum the company enjoyed last year. We upgraded our forecasts twice last month due to strong trading, expansion/refurbishment activity picking up and the acquisition of The Stable restaurant chain. Given that and eight months remaining in 2015E, we are holding our forecasts at this stage.
“We are holding our forecasts (2015E PBT: £35.3m / consensus £34.8m) which are based on cautious assumptions of 3% managed LFL sales growth, 1% tenanted LFL profit growth and 2% brewing volume growth. Given this and seven new managed pubs having already been scheduled for 2015E (and yet proforma net debt / EBITDA remains at 2.5x), vs four in 2014, we believe forecast risk remains on the upside.”
Marston’s
Marston’s issued its Interim Management Statement for the 41 weeks to 19 July 2014.
Trading
“We have continued to make good progress in line with our expectations. The impact of the World Cup was broadly neutral,with higher drinks sales offset by weaker food performance in our pubs,and strong sales growth in the off-trade.
“In Destination and Premium, like-for-like sales for the 41 week period were 4.1% ahead of last year, including like-for-like food sales growth of 4.2% and like-for-like wet sales growth of 3.5%. Operating margin is slightly above last year and we are on track to complete 27 new-build pub restaurants in the current financial year.
“In Taverns, like-for-like sales for the 41 week period were3.0% ahead of last year. Our franchise business continues to perform strongly and now operates in around 550 pubs.
“In Leased, like-for-like profits for the 41 week period are estimated to be up 3% compared to last year.
“In Brewing, own-brewed beer volumes were up around 1% compared to last year including 10% growth in off-trade volumes during the World Cup.
Ralph Findlay, Chief Executive Officer commented:
“We have continued to make good progress in implementing our strategic priorities with our focus on investment in new pub – restaurants, the expansion of franchise and the continued development of our premium beer portfolio all contributing to our growth targets. We remain confident of achieving our expectations for the full year.”
Numis commented:
“Trading remains ahead even though LFL sales/profit slowed in Q3, as expected, due to tougher comps. Marston’s is well placed to drive strong growth over the medium-term, underpinned by a new build pipeline that extends out to 2017E, the conversion of the Taverns estate to franchise and ongoing market outperformance in leased and brewing. We are holding our forecasts (2014 PBT: £85.3m / consensus: £86.2m).
“With only 1% price increases needed to mitigate cost inflation in 2015E, we believe Marston’s should generate double-digit growth in 2015E and 2016E. Over this period, returns should continue to rise, leverage should fall and managed/franchised profits should rise to 85% of pub profits. Given these trends and a dividend yield close to 5%, our recommendation is Buy.”
Mitchells & Butlers
M&B’s Q3 Interim Management Statement shows total sales growth in the third quarter was 3.8%, bringing growth in the first 42 weeks to 2.9%:
“Over the third quarter like-for-like food volumes continued to increase, although sales remained flat as we held prices and saw a decrease in food spend per head. This reflected a weak eating and drinking out market in the UK during May and June, exacerbated for restaurants by the impact of the football World Cup. In the last few weeks we have seen an improvement in demand, particularly for food, from these levels. Operating margins are slightly below last year.
Like-for-like sales | H1 2014 28 weeks to 12 April 2014 |
Q3 2014 14 weeks to 19 July 2014 |
Trading to IMS 42 weeks to 19 July 2014 |
Total | 1.1% | 0.0% | 0.7% |
Food | 0.9% | 0.6% | 0.8% |
Drink | 1.3% | -0.5% | 0.6% |
Acquisition of the Orchid Group
“We successfully acquired 173 outlets from the Orchid Group (‘Orchid’) on 15 June 2014 and their results are included within total sales for the five weeks following this date. The acquisition is in line with our strategy to focus on long-term growth in the eating-out market and provides significant opportunity for sales and margin growth through both the conversion of selected sites to Mitchells & Butlers brands, and through cost synergies from the combination of support functions.
“Integration is progressing well and we remain confident that the acquisition will be immediately enhancing to adjusted earnings.
Cash flow and balance sheet
“Since the date of the half year financial statements (12 April 2014), there have been two significant balance sheet movements, both of which have been previously announced.
“Firstly, we reached agreement on the triennial valuation of the group pension schemes as at 31 March 2013, including a funding shortfall of £572m and a revised schedule of contributions. As a result net balance sheet pension liabilities under IAS 19 (revised) have increased by c£200m after tax.
“Secondly, net debt at the end of the third quarter has increased following the all cash purchase of Orchid for £266m. The substantial majority of this consideration was funded using existing cash resources in addition to putting in place unsecured facilities totalling £150 million, provided by existing lenders. The new facilities have a maturity of three and a half years.
“In addition to the Orchid transaction we have opened 20 new sites and converted 8 sites so far this financial year.
Alistair Darby, Chief Executive, commented:
“Despite the slowdown in the UK eating and drinking out market during May and June, we remain confident in our well established strategy. We have continued to achieve growth in food volumes, further improvements in staff turnover and strong Net Promoter Score – all key lead indicators of long term success.
“This is an exciting time for our business as we start the integration of the high quality Orchid estate, which we believe will accelerate our growth and create significant value over the long term. We remain focused on our strategic priorities and are well-placed for future success.”
Numis commented:
“LFL sales were unchanged in Q3; and we are cutting our forecasts by 2%. The company’s ongoing malaise leaves its ability to expand and reintroduce dividends in question. Management claims LFL trading has picked up over the last three weeks and that it is hopeful of stronger LFL sales in 2015E, but there have been many false dawns.”
And: “Having one of the highest-quality estates in the sector, M&B has long-term potential. However, one has to question whether this potential will be realised.We downgrade to Hold to reflect a further likely postponement of the reintroduction of dividends.”