The pub industry faces onerous costs, including unfair business rates and beer duty. Over 850 pubs closed in Britain in 2018, continuing a decline that’s been running for many years. However, I believe this backdrop makes the best-managed pub groups attractive investments, provided their shares can be bought at a reasonable price. With this in mind, I’m looking at three companies that potentially fit the bill.
Greene King (LSE: GNK)
FTSE 250 — founded 1799 — share price 664p — market-cap £2,058m
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Has a chief executive of 14 years standing. The biggest of the three groups, with two breweries and an estate of 2,798 outlets across England, Wales and Scotland. Also, a nice perk of discounts on food and drink for shareholders owning a minimum of 100 shares.
Fuller, Smith & Turner (LSE: FSTA)
FTSE SmallCap — founded 1845 — share price 1,150p — market-cap £637m
Another venerable pubs group and brewer, it also offers shareholder perks (on a minimum holding of 500 shares). Descendents of the founders remain major shareholders and stewards of the business. Geographical focus of 385-pubs estate is London and southern England.
City Pub Group (LSE: CPC)
FTSE AIM — founded 2011 — share price 237.5p — market-cap £146m
Relatively new company, but key members of team are industry veterans. Previously founded Capital Pub Company in 2000, sold to Greene King in 2011 after it trumped an offer from Fullers. City owns fewer pubs (44) than Fullers, but geographic footprint is similar.
Valuation
The table below shows some key metrics for the three companies.
| EV/EBITDA | P/TNAV | Net debt/EBITDA | Dividend yield (%) | |
| Greene King | 8.5 | 2.2 | 4.2 | 5.0 |
| Fullers | 12.0 | 2.1 | 3.1 | 1.7 |
| City Pub | 19.5 | 1.9 | 1.1 | 1.2 |
The asset valuation P/TNAV (market-cap divided by tangible net asset value) is broadly similar for the three companies. The variances in the other metrics — the earnings valuation EV/EBITDA (enterprise value divided by earnings before interest, tax, depreciation and amortisation), net debt/EBITDA (a measure of balance sheet strength) and dividend yield — largely reflect their relative stages of growth/maturity.
If I already owned these stocks, I’d be inclined to continue to hold. However, for a different reason in each case, I’m not moved to buy right now.
Waiting game
Most of my Motley Fool colleagues are keen on Greene King, because of its cheap earnings rating and high dividend yield. However, while property-backed pub groups can tolerate a higher level of debt than many businesses, and Greene King’s net debt/EBITDA is within management’s target range, I do find the level a little concerning. Particularly as one analyst has suggested there’s something of an element of smoke and mirrors in the company’s current programme of refinancing high-interest bonds. I’d like to have a close look at the next annual report before committing here.
I’m holding off on Fullers for the moment because it’s recently agreed to sell its brewery (and associated businesses). This is a big deal. The EV of £250m being paid for the assets compares with a current total group EV of £860m. I’m minded to wait and see how Fullers’ numbers stack up after this significant disposal.
Finally, City deserves a higher earnings rating as a fast-growing business. But I think the EV/EBITDA of 19.5, as well as P/TNAV of 1.9, are just a bit too high. Predecessor Capital was sold to Greene King at ratings of 13.7 and 1.7. I reckon the market has inflated City’s valuation due to management’s past success with Capital, and I’m looking for a lower entry level.
