Pub operator Marston’s (MARS) is making a sensible strategic decision to cut back investment in its new build expansion during a difficult time for the pub industry.

But the move is expected to slow profit growth and leave the dividend static at 7.5p until September 2020, and that is not going down well with investors. Shares in Marston's are down 3.5% at 99.2p in morning trade on Wednesday, close to eight-year lows.

The dividend yield at 7.5p is currently 7.5% and growth has been steady recently, rising from 7p between 2015 and 2017.

Shore Capital analyst Greg Johnson says reduced investment is forecast to lower profit growth by £2.5m to £3m per annum from 2021, but is expected to be materially offset by lower interest charges from a smaller debt pile.

Johnson has lowered his pre-tax profit forecasts by £5m in 2023 to £131m, but he is confident free cash flow could rise significantly from £45m in 2019 to £80m in 2022 if Marston’s can meet targets.

Marston’s strategy change emerges during a difficult time for pub operators, which are battling higher labour costs, intense competition and wobbly consumer confidence.


Marston’s wants to cut net debt by £200m to £1.2bn by September 2023 by reducing investment in new builds from £50m to £25m every year from 2020 to focus on pubs with accommodation, which are enjoying the strongest returns.

Between 2020 and 2023, the pub operator is also planning to dispose £80m to £90m in certain non-core assets.

Numis analyst Tim Barratt believes slashing investment will take leverage close to a forecast 4.7 times – the lowest level for the company since 2006. By leverage Barratt means the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA).

Investors are generally comfortable with levels of under three- times, although Martson's gets more leeway because of its large freehold estate, which in a pinch, could be sold off to repay borrowings.

Barratt estimates after Marston’s completes its new strategy, it can deliver £95m in free cash flow every year. Approximately £50m is anticipated to be used to fund the dividend with £45m being used to service debt.

Marston’s also updated on trading over the vital Christmas period, highlighting like-for-like sales growth of 5.7%.


Issue Date: 23 Jan 2019