The pub operators have been poor performers on the stock market this year, dragged lower by the woes of The Restaurant Group, the City’s mistrust of JD Wetherspoon’s strategy and sluggish growth at several of the more indebted businesses. The first factor is almost entirely self-inflicted; none has much to tell us about the performance of the two sector leaders Greene King and Marston’s.
I have said before that the sector is dividing, with the better-funded businesses pushing ahead of the rest as customers demand higher standards in food and surroundings, all of which require hefty investment.
The general environment for consumer spending remains favourable, as Marston’s pointed out yesterday. Getting price increases through is difficult and they have to be earned by providing better products or services. Fortunately, the company is able to do this by putting pizza ovens and chicken rotisseries into its premium pubs. Marston’s can afford to spend £70 million annually, including on building 25 new food-led pubs or lodges a year. It avoids “hot spots” such as town centres where competition for sites is too strong.
The halfway figures, then, showed that it is outperforming the market, with revenues and profits before tax both up by almost 12 per cent and average profit per pub up by 13 per cent, or 44 per cent since 2012. This has been achieved by that new build and the disposal of about 600 underperformers, mainly taverns, a programme that is pretty much over. There is also the kicker of the purchase of the Thwaites brewing division, which brought with it some attractive brands and the contract to supply the Thwaites estate.
As those improvements come in, further outperformance becomes more difficult, while some have suggested that debt stuck stubbornly at about £1 billion has constrained growth. The company denies this and most new pubs can be financed as an attractive sale-and-leaseback arrangement, but the leverage multiple looks uncomfortably high and will come down only as earnings grow— that is, relatively slowly.
Still at 152¾p, up 2¾p, the shares sell on 11 times’ earnings and yield 4.8 per cent. On the basis that the price falls have been overdone, they look attractive.
Revenue £429m
Pre-tax profit £33.1m
Dividend yield 4.8%
£70m Annual spend, including 25 new pubs a year
MY ADVICE Buy
WHY The shares have been marked back a little for reasons nothing to do with underlying performance and look like good value again
SSP Group
Terrorist attacks in Egypt, Paris and Brussels have had an inevitable effect on spending at SSP’s outlets at railway stations and airports, but the impact has been relatively muted. Like-for-like sales growth of 4 per cent-plus in the first quarter slowed to about 2.5 per cent in the second and there clearly were few tourist aircraft flying into Egypt, but people merely switched elsewhere, with Spain strongly ahead.
There are, I have suggested, three main drivers to SSP’s growth. There is that like-for-like sales improvement, as more tourists travel through the places it serves. There is the opening of new outlets, which contributed another 2 per cent to a 5.9 per cent rise in revenues in the first half, ahead of negative currency effects. And there is the improvement in margins as the business is run more efficiently and new products are on offer, such as new fascias and brands.
Operating margins rose by 50 basis points to 3.4 per cent, but they are running well below where they were in 2008, before the onset of the financial crisis.
The shares were sold off at the start of the year but have regained their ground, adding another 9p to 309p as the first-half figures came in better than expected, especially in terms of those margins. They sell on almost 22 times’ earnings.
SSP has a bit more than 10 per cent of a global market that is growing at perhaps 5 per cent. That multiple requires a degree of growth that will be there in due course, but it does not encourage an immediate “buy”.
Revenue £897m
Pre-tax profit £23.2m
Dividend yield 1.6%
MY ADVICE Avoid
WHY Long-term growth is there but rating looks high
Assura
At some stage someone is going to have to spend some serious money on upgrading GPs’ surgeries to prevent us all making expensive trips to A&E and it is not going to be public sector money. Fortunately there are three quoted companies that make it their business to invest in surgeries, taking a rental income in return, which funds attractive dividend payments. Primary Health Properties is the best known; this buys them off the peg once they are built.
Assura’s model is to become involved in the construction, providing those GPs with a ready-made surgery. It also buys existing buildings. There has been a slowdown in the number of approvals for new surgeries coming from the NHS and, as a result, new-build accounts for only about a fifth of all investment.
The company raised £300 million in October and has the funding in place for any expected investments. It makes quarterly dividend payments. The forward yield on the shares, off ¾p at 57p, is just short of 4 per cent. The yield on PHP shares is more attractive, but Assura’s model offers a better rate of return, reflected in a higher rating.
NAV 45.8p
Pre-tax profit £28.8m
Dividend yield 3.9%
MY ADVICE Hold
WHY The yield is attractive but there is better elsewhere
And finally...
The quoted infrastructure funds have been reporting results for the year to March 31 and they have been pretty well the same in all cases. We had 3i Infrastructure last week, John Laing Infrastructure the other day and HICL yesterday. All invest in schemes, often private public partnerships, and use reliable income to fund decent returns to investors. HICL has been raising fresh funds from investors over the past year to pay for the £242 million invested over the year. Its increased dividend target this year gives a forward yield of 4.6 per cent.
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