Marston's: A 'compelling valuation'

After a rough ride, a rally today and support from City big-hitters is reason for optimism.

A frothing Marston's (LSE:MARS) share price was a welcome sight for investors today after the pubs chain gave some welcome re-assurance on its dividend and recent trading performance.

Shares surged 6% to 107p, with the owner of Pitcher & Piano bars and more than 1,100 'locals' finally showing signs it may break free from its narrow trading range of the past two years.

The Wolverhampton-based company's interim results impressed analysts on two fronts, particularly its progress on de-risking the balance sheet through a deleveraging plan. This initiative received a major boost today with the re-profiling of interest swaps, which is expected to save the group some £5 million a year up until 2024.

Half-year operating cash flows were also up by a healthy 6% to £66.8 million, while Marston's reiterated its plans to reduce capital expenditure by £30 million this year and by a similar amount next year. It is also targeting £120 million of disposals by 2023, a figure much higher than previous City expectations.

The progress of its plan allows the company to stick by the pledge made in January to keep the dividend at its current level during the period of debt reduction up to 2023. The interim pay-out was maintained at 2.7p a share today, providing Marston's shares with a 7.4% yield.

Source: TradingView Past performance is not a guide to future performance

The other positive concerned recent trading after all three operating divisions achieved growth during the half-year period. Like-for-like sales across both managed and franchised pubs accelerated to 2.2% from 1.4% at the 16-week stage, helped by favourable weather comparatives.

Strong Easter trading has maintained the momentum into the second half of the year, while the Pedigree and Hobgoblin beer business grew sales by 8% and volumes by 4% in the half-year period. The division operates from six breweries, producing around 1 in 4 of all premium bottled ales and around 1 in 5 premium cask ales in the UK.

With Marston's confident of meeting expectations for the full year, analysts at Shore Capital upped their 2019 forecasts by £1 million to £105 million and by £3 million to £116 million for the following year. This takes into account the reinvestment of some of the cost saving benefits from the re-profiled interest swaps into pub business margins.

Shore said: "Recent updates have been solid with wet-led pubs performing well and food-led margins maintained. The catalyst could be the beer business given its attractive brand portfolio and national distribution."

Shore values the stock at 130p based on a price/earnings (PE) multiple of 10x, while at JP Morgan Cazenove they have raised their price target by 4p to 127p. This is based on a "compelling valuation" across several metrics and supported by a credible deleveraging plan, which JP Morgan says removes a key investor concern.