Forecasts make Marston’s (LSE: MARS) shares look very cheap, so what might we be missing?
The brewer and pub operator’s last full year ended on 1 October 2022. And it showed a big improvement over 2021. Revenue almost doubled, and profit returned after several years of losses.
The hospitality business was one of the hardest hit by the Covid pandemic. And as the chart above shows, Marston’s shares plunged along with profits.
We’re looking at a 60% slump in five years. Even over the past 12 months, as forecasters turn bullish, Marston’s shares are down 45%.
Valuation
Analysts expect earnings growth for 2023, which would put the shares on a price-to-earnings (P/E) ratio of only around eight. However, I must be cautious here.
We’re barely into Marston’s financial year, and a lot could happen before we reach its end. Still, for the 16 weeks to 21 January, like-for-like sales were 13% ahead of last year. And compared to the same period in pre-pandemic 2019-20, sales were up 4.5%.
There are plenty of shares on low P/E multiples these days though. It doesn’t necessarily mean they’re good value, and a good few really do warrant low prices.
Forecasts
But looking further ahead, forecast earning growth could drop the P/E to around 5.5 in 2024, and to five by 2025. Again, forecasts need to be treated cautiously. But I don’t see many showing that kind of growing earnings and falling valuation.
What’s the downside (because there has to be one, doesn’t there)? Well, yes, there’s no such thing as a free beer. In Marston’s case, as with so many damaged by the pandemic, it’s debt.
At 1 October 2022, net debt stood at a whopping £1,216m. That’s down a bit from 2021, when it reached £1,232m. But the company’s market-cap is only £300m. The debt mountain is valued at four times the entire company. That makes those P/E valuations perhaps a bit misleading.
Real valuation?
We can calculate an enterprise value P/E multiple by adding net debt to the firm’s market-cap, and comparing that to earnings. On that measure, even the forecast 2025 P/E would rise to an effective 25. And that doesn’t scream to me to buy.
So does debt wipe out any value in the current Marston’s share price? I don’t think so. Marston’s operates a largely freehold pub estate. At the end of the 2022 year, its property was valued at £2.1bn. That puts its net asset value per share at 102p, with the shares priced at just 44p, as I write. I see attraction there.
Good value?
If the board is successful with its debt reduction strategy in the coming years, I think the shares could look good. If earnings forecasts are close to accurate, improving cash flow could make a real difference. And we might even see dividends, as forecasters also suggest.
So no, Marston’s shares might not quite be a steal right now. And the true valuation might be hard to pin down. But I could see a long-term buy here for patient investors.
