Marston's makes it a double (digit growth)

Thanks to a raft of new posh pubs, its popular brewery and clever acquisition of Thwaites, Marston's is pulling off double-digit profit growth despite touch markets and an expensive expansion programme. With thousands of typical old boozers shutting down each year, at least this mid-cap publican is doing something right.

Underlying revenue, pre-tax profit and earnings per share (EPS) all jumped 12% in the six to 2 April, up to £429 million, £33.1 million and 4.7p, respectively. Marston's acquisition of Thwaites has played a big role in growth this time, with the company swinging from a reported loss to £22.8 million profit this year. Average profit per pub jumped 13% in 2016, taking growth to 44% since 2012.

With like-for-like sales growth of 3% across its pubs, the expansion of its estate is really helping drive growth. Times are tough for all pub operators who must now go upmarket and focus more on their food offering to make ends meet. Seven pubs and three lodges were opened in the period and a first new-build Tavern was opened under the franchise model. At least 20 pubs will be opened this year, plus with five lodges, adding to the existing estate of 1,600 pubs.

Marston's brand portfolio is crucial to its success, with volumes growth of 22% outperforming the market and growth in the market share of its premium cask ale and bottled ale. Launched two years ago, the Hobgoblin Gold bottled ale is now a "top 15" brand.

The interim dividend goes up 4% to 2.6p per share, covered 1.8 times by earnings. Although operating cash flow rocketed 40% to £81.3 million, net debt was flat at £1.3 billion - understandable given the Thwaites buy. Excluding some property leases, the net debt to underlying cash profit ratio eased to five times. As long-term debt amortises, this ratio should fall further.

With two big legislation acts coming into force in the second half - the Pubs Code and Living Wage - investors are nervous. But management don't think there'll be much of an impact as the Pub Code only affects tenanted and leased pubs, which generated just 15% of Marston's profit. It's also factored in an increase in staff costs already.

Relying on technical support at around 143p for the second time in 2016, Marston's has bounced 7% this month after losing nearly a fifth of its value since December. Initially jumping 5% to 157p Wednesday, the shares briefly broke through 38% Fibonacci retracement and 200-day moving average. However, profit takers moved in and the shares have closed back below a bearish trendline.

While the shares trade on an inexpensive 10.4 times 2017 earnings estimates, they do offer a dividend yield of 5%. With shareholder returns supported by strong cash generation, the valuations look undemanding. Numis analyst Wyn Ellis reckons the shares are worth 185p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.