Today’s full-year results report from Marston’s (LSE: MARS) is a handy opportunity for me to revisit the firm. I last looked at the pub operator and brewer in May when the interim results came out.
Since then, the share price is around 20% higher at today’s level around 126p. In the spring, I thought the main attraction of the company was its big dividend. Even now the anticipated yield for the trading year to September 2020 is running just below 6%, so the attraction remains.
Debt reduction plans in full swing
And it’s reassuring to me that the directors decided to hold the dividend flat for the full year being reported today. I think that signals a cautious and conservative approach, but at least it’s not a cut.
The report headlined a reference to the debt reduction plan, which it said is “progressing well”. In May I talked a lot about the firm’s high level of debt and described it as “the elephant in the room”. In today’s report, the company said its debt structure is long term and secured against the 91% freehold estate. Interest rate exposure is hedged using interest rate swaps.
That strikes me as useful insurance because the stakes are high when it comes to the bill for interest. The cash flow statement revealed to us that the firm paid interest of just over £74m during the year and shareholder dividends cost almost £48m. The whole lot was financed by earnings before interest, tax, depreciation and amortisation (EBITDA) of almost £150m. That left £28m for other purposes.
I reckon the company has been juggling big costs and interest has been competing with the dividend for cash flow. There doesn’t seem to be much room for manoeuvre. So I find it encouraging that it set out a commitment during the year to target a £0.2bn reduction in net debt by 2023.
After that, the directors are aiming for the business to generate consistent net cash flow, after dividends, “of at least £50m per annum”. When that happens, the firm will decide whether to continue to reduce the overall level of debt or to plough money back into the business for growth.
The market is still growing overall
Because of this focus on debt reduction, management has deferred new-build pub investment “for the time being”. And also plans to dispose of £150m of non-core assets between 2020 and 2023. The directors said in the report the progress on overall debt reduction plans is “ahead of schedule” and they are looking for ways to accelerate the improvements. Reassuringly, the company is “committed” to holding the dividend flat while the process plays out.
With all the pub and restaurant closures we’ve seen, I reckon it is wise to question whether the sector is attractive. But Marston’s said in the report that the eating-out and drinking markets are growing overall. And there could be opportunities for the firm to benefit from the reduced supply in the market.
Sales in the current year are ahead of last year so far and I reckon Marston’s will probably navigate Brexit uncertainty and other challenges, so I am still attracted to the shares.
