Stockwatch: is this the latest chart pattern to back?

On 3 October, I drew attention to pub shares trading cheaply relative to tangible net asset value, in particular Marston's (LSE:MARS) at 0.6x at 39.5p a share and Aquis-listed Shepherd Neame Ltd (AQUIS:SHEP) at 0.4x.

From May to early June, Marston’s had achieved a like-for-like uptick in trading and recovered operating profitability of £19.0 million over 31 weeks. The consensus normalised earnings per share (EPS) expectation implied a near-doubling to 7.8p and, if realistic, a rise to 8.8p for the September 2026 year, a 12-month forward price/earnings (PE) ratio of just 4.5x.

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A chief reason for this rating was £1,254 million of net debt accumulated in expansionary years, relative to a £250 million market capitalisation, the interim results showing net interest swiping 68% off operating profit. While this made me cautious about a “buy” stance, I drew attention to a trading update due on 8 October as a possible [source for] firming up of conviction and noted historic director share buying.

The situation is also interesting in terms of the validity of “bowl” chart patterns, where Marston’s has exhibited this classic bullish form in the last three years:

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

The 8 October update in respect of the financial year to 27 September, elicited underlying pre-tax profit ahead of market expectations and free cash flow past a £50 million target, ahead of schedule.

However, like-for-like sales were up only 1.6%, barely matching inflation. Year-end net debt was not cited, just a comment that it was below 5x EBITDA (earnings before interest, tax, depreciation and amortisation).

Is this a tell-tale sign of decent Christmas trading statements ahead?

The shares had advanced steadily from 39p to 48p by the end of October, slipped to 44p in November, but enjoyed a 20% spike on Tuesday. They are currently 60p after this week’s annual results were essentially in line with October’s update but included a tease about how Christmas bookings were up 11% year-on-year.

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This is interesting – with wider relevance – given that it hints that UK consumers may be less strapped and willing to spend. Might it be a tell-tale for decent-enough Christmas trading statements, hence new-year upside in selective retail shares?  

It also appears to validate my feeling about how Marston’s marketing position is a good one for straightened times, offering good value food and drink for people trading down from restaurants. At least this could imply enough revenue resilience to generate cash both to fund refurbishments and steadily pay down debt.

Reducing financial risk is an essential driver 

While Marston’s is no growth share, my sense is that if the company can grind down its debt in the years ahead, this will improve the share price discount to net assets.  

Annual operating profit is up a modest, if decent, 9% to £160 million, with an amply respectable 20% margin up from 17%. At the pre-tax level, profit is up 71% to £72 million, marking “a second consecutive year of significant profit growth driven by our progress on like-for-like sales, contribution from new formats, cost control and lower interest costs”.

This helped recurring free cash flow rise 22% over £53 million, ahead of target and schedule.

The nine-year table shows a strong record of operating cash flow being maintained despite pre-2022 involving relatively high levels of capital expenditure. More recently, and especially this last financial year, free cash flow per share has been 2.6x normalised EPS.

Marston’s - financial summary
Year-end 29 Sep

Source: company accounts.

The headlined reduction in net debt excluding leases is modest - down 5% to £838 million – which marks a slowing in context of more than a 30% reduction since the September 2022 year. From the balance sheet, total net debt was £1,206 million, down barely 4% year-on-year.

Net gearing remains ostensibly high at 157% but is improving, helped by a 5% upwards revaluation in the freehold estate to £2,181 million. Net tangible assets per share up over 20% to 120p, are probably also helping the shares rise, given a 50% discount currently, while the operations narrative sounds encouraging.

Useful initiatives to attract and retain customers

Management proclaims a “record reputation” score up from 800 to 816 based on guest satisfaction. Thirty-one format conversions during the financial year achieved specific revenue uplifts of 23% (if implying falls elsewhere and/or a reduction in falls given group revenue is near static). When pub groups say this kind of thing it seems vague as to whether the expenditure/initiatives were required chiefly to remain competitive, or if there is upshot for growth.

Anyway, there is an accelerated capital expenditure programme for the September 2026 year, with a significant step-up in refurbishments, so perhaps this can help group revenue growth beat inflation.

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Marston’s also talks of a “demand-driving event programme”, which older drinkers might associate with bingo nights but now includes Trivial Pursuit “win a wedge”, Paddington in Peru and Cool Hand Cup darts. An enhanced order and pay platform is said to have helped a 10% increase in spend per guest. It’s hard to assume improvements are all linked to this but, if so, it is impressive.

All this appears to affirm the appointment of Justin Platt as CEO from early 2024, with more than 30 years of experience in hospitality and consumer-facing businesses, most recently as strategy chief of Merlin Entertainments.

Background of continued rising costs under Labour

The share price strength is intriguing given the context this week of a 4.1% rise in the UK minimum wage to £12.71 an hour. The hospitality trade has frequently complained about higher costs.

Yet Marston’s results proclaim a “Right People, Right Time” labour model offsetting National Insurance and minimum wage increases, demonstrating an ability to absorb external cost pressures and protect margins, with further opportunity ahead.

Other pub bosses have warned, however, of sharp increases in business rates payments going into 2026, where a new system from April will see rate multipliers for retail, hospitality and leisure firms set 5p lower than the standard rate with no cap as currently applies at £110,000 per business.

But one tax advisory firm has suggested the change, plus an increase in rateable values for most pubs, will result in a sharp annual increase – two-thirds for the average pub to near £15,400. An inflation-linked increase in alcohol duty will also make running pubs more expensive.

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Marston’s emphasises being “well-positioned for a strong festive period” with, as a mid-year teaser, the 11 June to 19 July FIFA World Cup.

As ever in retail, the question is what happens to consumer demand when bills start landing in January. However, such fears proved generally overdone in early 2025.

No short selling, instead a new disclosed private shareholder

On 28 October, it was disclosed that US private investor Bradley Louis Radoff had accumulated a 3.0% stake (this being the threshold for disclosure), which seems encouraging in terms of how he perceives value.

On the short selling side, there is nothing nowadays over the 0.5% threshold. From 2013 to 2023, disclosed shorting varied from 1% up to 5% of issued share capital, but then petered out. It shows how attention to shorting can be useful for long-only investors given that Marston’s fell from around 160p some 10 years ago, bottoming out at 27p in April 2024. Since then, it has been in a volatile, gently upward trend until this spike from around 45p.

Marston’s micro-economic credentials therefore look promising, with a steady reduction in manageable debt enabling improvement in a big discount to assets. The group is well-positioned marketing-wise, although one must be mindful of extra government taxes on business.

Overall, and while a share price spike can settle back near-term, I am inclined to think fundamentals and the chart pattern imply a “buy” stance for patient investors.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.