Stockwatch: why I’m downgrading my view on this share

The chaos unleashed by President Trump is disrupting many a trusted assumption about investing. In the last week or so, I have covered higher risk/reward shares that spiked from mid-April. But are such rallies justified by company fundamentals or do they mainly reflect irrational exuberance – that tariff threats can be safely ignored?

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Financial theory says this kind of share often has a higher “beta value”, meaning it is more volatile than the wider market. Company dynamics are particularly uncertain.

Yet the re-rates include a relatively conservative pubs group, Young & Co's Brewery Class A (LSE:YNGA), which at 990p is up 34% since 4 April after a persistent downtrend from 1,220p since July 2023. This is despite a Christmas period update citing like-for-like revenue up 11.6%, or by 30.4% including the March 2024 acquisition of City Pubs. The company said: “We continued to break sales records across the period, delivering some of the highest daily sales in Young’s history. Our recent pub investments performed exceptionally well.”

This update did remind me of “headwinds facing consumers” and also “the increase in both National Insurance contributions and National Living Wage”, but described the business as being “in great shape” with “optimism about the year ahead”.

That the AIM-listed shares proceeded to drop from 970p to 760p by end-January possibly reflected jaundice around a major low, and in hindsight a second drop from 848p to 740p in March marked a classic “double bottom” reversal pattern. Remarkably, this was well down even on the previous Covid low of 800p in November 2020.

In a five-year context, the re-rate can thus be seen as an overdue mean-reversion after nearly two years of extended downturn:

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

But it is curious how it has taken a wider market rally to prompt convergence on fair value. The shares were around 880p when a 30 April update in respect of the end-March financial year, cited group revenue up 25.4%, or by 5.7% like-for-like. The January to March final quarter achieved 16.2% and 7.7% respectively. Young said: “This strong performance, which has been delivered against widespread challenges facing the sector, is testament to Young’s proven strategy and its commitment to continuous investment in its premium estate.”

What of profit in the actual financial results?

Shorn of a £33.5 million “non-underlying cost” (£28.7 million in the March 2024 year) the 5 June annual results show adjusted EBITDA up 23% to £113.6 million, roughly in line with revenue, and the adjusted operating margin steady at 14.7%.

Note three to the accounts clarifies £21.8 million, or 65% of this exceptional cost as constituting net valuation changes in properties. Impairment losses rose from £5.5 million to £8.7 million. Perhaps you could say only a rise in restructuring costs from £0.1 million to £3.2 million and £1.2 million costs related to the City Pubs’ acquisition weigh on the business, if it is regularly acquiring.  

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Even so, adjusted profit growth at the pre-tax level was only 4.5% (just a tad ahead of inflation) to £51.6 million. Finance costs leapt from £8.1 million to £19.9 million, and note six clarifies as a huge jump in bank interest from £5.3 million to £15.8 million. This really should be explained.

Even adjusted earnings per share (EPS) slipped 2% to 61.8p, for an historic price/earnings (PE) multiple of 16x at current market price, falling 15% to 16.1p at the reported level. So, Young’s net outcome was less impressive than the revenue dynamics in trading updates.

A mixed stance on prospects

Fine April/May weather has boosted trading in the new financial year given Young’s extent of pub gardens and riverside locations. Total sales over nine weeks up 9.4%, or 8.0% like-for-like, also benefited from Easter falling in April this year.  

Management also cautions about the National Insurance rise and the unstable macro environment. While not in this release, an £11 million hit to profit – over 20% at the pre-tax level – has previously been cited with respect to NI, with efficiency gains, technology improvements and investment as possibly mitigating this.

As yet, the market expectation for the current year are a near-flat earnings scenario of 63.6p per share based on near £40 million net profit on just over £500 million revenue. Young’s relatively high-quality outlets in affluent areas of mainly southern England, are shrugging off a difficult consumer environment and higher costs – quite as they did after the 2008 crisis and recession.

It’s unclear whether this is a cautious compromise as analysts are prone to project when the outlook is uncertain yet the business decent. You pencil in something a bit better than flat but await updates rather than stick your neck out.   

Divergent valuation parameters  

The table shows how, in terms of net asset value per share and linking the above chart, Young’s market price slipped below net asset value (NAV) in 2022, having previously sustained a premium aside from the Covid-linked downturn in 2020. 

Net tangible assets per share are 1,123p, hence the shares trade at a near 12% discount still. It is a very strong end-March balance sheet: £252.5 million debt with a modest £88 million lease liabilities, versus £1,042 million property/equipment and only £77 million goodwill. The leap in interest charge is tricky to fathom given net debt has fallen over 7% and, although £20 million debt was re-classified as short-term, it does not account for the interest hike.

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Is NAV therefore the lead benchmark here, such that the shares were always likely to mean-revert up, the “Trump always chickens out” market rally simply being a trigger for what was mathematically due? The 34% re-rate suggests so.

Yet assets are strictly worth what they can earn, and a PE over 16x looks high enough - this being a group where around 280 pubs with over 1,000 bedrooms benefit from scale in terms of food and drink buying. It is hardly as if the parts could earn more than the whole, and acquisitions make strategic sense. 

Young & Co's Brewery - financial summary
Year end 30 Mar

Source: historic company REFS and company accounts.

As for yield support, the table shows capital expenditure absorbing often more than half of operational cash flow, hence free cash flow per share is lower than EPS. While earnings cover for the dividend is generally not less than twice, and around 2.4x is presently forecast, cash flow cover – which is what counts - can be a bit tighter.

With a 23.8p per share payout as consensus for the current year, Young’s dividend yield is therefore a modest 2.4% prospectively and was only around 3% at April’s share price low.

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A recent dilemma for the shares is thus no great appeal either to income or growth-oriented investors, but as I suggested last November with a “buy” stance at 935p, it is a quality candidate as part of inheritance tax planning. Mind, last autumn’s budget reduced Business Property Relief on AIM shares from 100% after two years of ownership, to 50% from 6 April 2026.

In the short term I believe consolidation is more likely than a continued rally, hence I adjust my view to “hold”. The re-rate is justified by fundamentals, if driven by vigorous risk appetite generally. While the previous depths of despair on Young’s are shown to be overdone, unless there is some kind of takeover in the background then patience seems more likely to reward buyers.

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