I bought Marston’s (LSE: MARS) stock in late 2018 at a share price of 98p because, at the time, I thought it was worth closer to 140p. Marston’s shares were trading at a price-to-earnings ratio of around 7 when I bought, so they looked cheap. Also, there was a 7.6% dividend yield — on a trailing 12-month basis — on offer. Today I sold my Marston’s stock at 100p.
Why I bought Marston’s stock in 2018
I liked the portfolio of beer brands that Marston owned. The company had recently acquired the Charles Wells Brewery, expanding its presence in the UK ale market. There was a broad portfolio of pubs covering everything from upmarket to local taverns. Of particular interest was Marston’s rooms business. Rooms are either attached to pubs or in custom-built lodges next to a Marston’s pub. These offer a revenue source and also drive revenues at the pubs. Marston’s was adding a couple of hundred rooms a year, and increasing the occupancy rate and average daily rate (two key metrics in the hotel industry).
From 2005 to 2007, Marston’s issued £1.35bn of securitised debt. Around 70% of its pub estate was transferred to a wholly-owned subsidiary to act as dedicated collateral for these loans. Marston’s also has floating-rate obligations which it uses interest rates swaps to convert into fixed-rate payments. Thus the debt pile was sizeable and complex, but management had a plan to start reducing it.
Why I sold my Marston’s stock today
The Covid-19 pandemic has walloped Marston’s. It could do nothing about the lockdowns that decimated its revenue streams, cash balances, and share price. To survive, it had to raise more debt, reversing the plan to cut debt significantly by 2023. There is now around 6.5 times as much debt as equity on the balance sheet. Dividends were also cut.
A brewing tie-up with Carlsberg in 2020 offered cash to set off against debt, and possibly operating efficiency, which gave me some optimism. But then there was a £300m write-down of property and goodwill at the end of 2020. On 3 February 2020, Marston’s revealed it had rejected a recent 105p per share takeover offer and prior offers of 88p and 95p in December 2020. Management believes that the bids undervalue Marston’s. Maybe that is true, but the share price uptick provides an opportunity to get out for me.
Marston’s revenue had already dipped in 2019, before the pandemic. In hindsight, the pursuit of an ever-larger pub estate, funded through debt, looks to have been the wrong call. Now a smaller, higher-quality pub estate, with less leverage, seems to be what will prosper after the pandemic. Selling underperforming pubs is a way to reduce debt and the estate, but I believe Marston’s is hampered here because many pubs are tied up in the debt securitisation. And, there is a question of how much the pub estate is worth now given those writedowns.
It may be the case that a higher acceptable bid comes in. Or maybe management can guide the company through the end of the pandemic, cut debt, generate profits again, and lift the share price even higher. My decision to sell might one day look foolish. But right now, I cannot bear the risks I see in Marston’s stock.
