The transformation of Marston’s (MARS) pub estate has boosted its pre-tax profit by 10% to £91.5 million and improved its quality of earnings, but the £913 million cap says there is plenty more to come.

Marston’s, trading 3% higher at 164.4p, has largely completed the three-year transformation of its pub portfolio, which saw it sell around 600 underperforming pubs and build 134 destination, food-led outlets.

The new sites are capable of generating annual EBITDA (earnings before interest, tax, depreciation and amortisation) of between £300,000 and £400,000. The pubs it sold were generating EBITDA of just £20,000 a year, according to Langton Capital.

Earnings per share are up by 10% to 12.9p in the year to 3 October and revenue is 7% higher at £845.5 million. The final dividend has been hiked by 4.7% to 4.5p.

MARSTON'S - Comparison Line Chart (Rebased to first)

Marston’s chief executive Ralph Findlay says the pub disposals impacted the group’s earnings in the past and it can now look forward to a period without an earnings drag.

He is sticking with his target of building around 20 new pubs a year, which he claims is the biggest driver of growth.

‘We’re able to find sites that aren’t located close to the competition and in places where we’re not up against casual dining operators,’ he says.

Marston’s is planning to expand its rotisserie and pizza concepts and increase the number of Generous George destination pubs from four to 10 by the end of the 2016 financial year.

Findlay says the group will also expand its accommodation, which is seeing occupancy rates of more than 70% and an increase in RevPAR (revenue per available room) of around 14%.

‘We built three lodges last year and I expected we’ll add another five next year,’ says Findlay.

Volumes in the brewing business are up 15% year-on-year and Findlay says the resurgence of craft beer and micro-breweries is helping rather than hindering Marston’s because the market overall is growing.

Numis reckons Marston’s EBITDA and dividend growth should drive a 26% equity return over the next two years, yet it trades on a 2016 price to earnings ratio of just 12 – a significant discount to its peers.

Numis’ target price is 180p, implying 9.5% upside.

Issue Date: 26 Nov 2015