Down the pub will be a good place for investors should Britain leave the European Union.
Although the possibility of Greece leaving poses the most immediate danger to the Europe’s economy, David Cameron’s pledged ‘in-out’ referendum on Britain’s future in EU represents a significant uncertainty for the future.
Economists have in highlighted a number of significant potential risks to UK business should the country leave. Britain’s pubs could, however, be among the beneficiaries.
Simon Matthews, analyst at Goodbody, describes the sector as a ‘safe haven’ in any ‘Brexit’ scenario.
Burdensome regulations could be rolled back, and that would be an offset to the impact there might be on the workforce due to immigration restrictions.
“If the UK exited the EU, we believe there will be a relatively low impact on the PubCo sector,” the analyst said in a note.
“The key impact of Brexit for the UK economy overall relates to the potential impact on trade flows. This is less of an issue for the UK pub sector given most beer is brewed in the UK.
“Looking across sectors, the pubs domestic bias suggests the sector would be a relative safe haven for investors in a Brexit scenario.”
Matthews, in a broader note on the sector, at the same time sees legislative change within Britain’s borders as a potential threat to some groups.
He highlights that more stringent drink drive laws in Scotland, which in simple terms means an ‘average’ male can drink no more than one pint of beer, has significantly impacted the hospitality sector.
Eventually, similar law changes are expected to follow south of the border in England and Wales.
Marston’s (LON:MARS), which has more country pubs, would be most exposed to this, according to Mathews, while he also predicts highstreet pub group JD Wetherspoon (LON:JDW) would be affected least.
“While we expect the drink driving limit in England and Wales to eventually be lowered, this will not happen in the next 18 months given the government’s agenda,” he said.
Mathews says Marston’s is also vulnerable because it is constrained by high interest costs of borrowings and dividends. Continued rollout of new pubs relies upon more debt, he added.
The Goodbody analyst cut his recommendation to ‘sell’ from ‘hold’.
A ‘buy’ recommendation for Greene King (LON:GNK) was repeated and the analyst increased his target to 100p from 845p. Similarly, Mitchells & Butlers (LON:MAB) are stays as a ‘buy’ and its target is raised to 550p from 485p.
Whereas JD Wetherspoon is deemed a ‘hold’ with a 830p target.