I wrote favourably about pub operator and brewer Marston’s (LSE: MARS) at the time of its full-year results back in November 2018. Indeed, the firm had been trading well and looked attractive to me on the grounds of a low valuation and a high dividend yield.
The elephant in the room
Today’s half-year results show continuing steady trading. But, in fairness, the big elephant in the room with this one is the high level of debt, and I’m going to examine that feature of the accounts a little more today.
You can get a quick steer on debt levels with any stock market listed firm by comparing the Enterprise Value (EV) with the Market Capitalisation. According to one popular share research website, Marston’s EV runs at just over £2bn and its market-cap is around £642m. The difference between the two figures (£1,358m) represents gross borrowings minus the cash the company holds. In fact, today’s report from the firm declares that the net debt on 30 March was £1,438m.
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That’s a lot of debt. It’s a higher figure than Marston’s entire revenue for last year of £1,140m. However, much of the debt is backed up by bricks & mortar assets on the balance sheet – think of all those pub buildings. Today’s report reveals the figure on the balance sheet for property, plant and equipment stands close to £2,438m and gross debt is around £1,600m. So not everything on the balance sheet is owned by the company’s lenders. The figure for net assets in the report is £899m, which compares to the firm’s market capitalisation of around £642m, which means the Marston’s trades on a reassuring discount to book value.
Weighted to the second half
But that discount won’t help the firm if it can’t pay the interest on the debt. Net cash from operations in the first half of the trading year came in at £66.8m and Marston’s spent £43.8m on interest payments. Dividend payments to shareholders then cost £30.4m, which led to an overspend in the period of £7.4m.
However, it seems Marston’s business could be weighted to the second half of its trading year because, if you look at full-year figures for 2018, the company had around £60m left over after paying its interest on borrowings and after paying shareholder dividends.
Nevertheless, I reckon the figures are quite tight and it wouldn’t take much of a general economic slowdown to turndown profits enough to put the firm in difficulty with its borrowings. Maybe that’s why the valuation looks so low with a historical price-to-earnings multiple of around seven.
But on the other hand, if you divide the enterprise value by last year’s Earnings before Interest and Tax (EBIT) you get a more-realistic valuation multiple of just over 11 – Marston’s isn’t quite as cheap as it looks.
I think debt is an issue here, and I’m pleased to see a focus on debt-reduction in today’s report with the company saying: “The Board is committed to maintaining the dividend at the current level during this period of debt reduction focus.”
Marston’s is trading well and I’m cautiously optimistic about the shares.
