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Marston's shrugs off Brexit hurdles but Greene King and Mitchells & Butlers struggle

Brexit has hit the pub industry as a weaker pound pushes up input costs and higher inflation puts a squeeze on consumers

Marston's
Marston's full year results were supported by acquisitions and pub openings

Marston’s plc (LON:MARS) has triumphed over higher Brexit-fuelled costs while fellow pub operators Greene King PLC (LON:GNK) and Mitchells & Butlers (LON:MAB) have struggled against tough market conditions.

A slump in the pound since the UK voted to leave the European Union last year has pushed up input costs for pub owners. At the same time, consumers have been spending less as their disposable incomes come under pressure from rising inflation and weak wage growth.

Pub and restaurant owners have also had to contend with increases in the minimum wage, the apprenticeship levy, business rates and duty taxes.

Despite the sector-wide cost pressures, Marston’s reported a 24% jump in pre-tax profits to £100.3mln and an 8% increase in revenue to £1.01bn for the year to 30 September.

Marston's growth boosted by expansion

The results were supported by the £55mln acquisition of the Charles Wells Beer Business, which brought well-known ale brands Bombardier, Young’s and McEwan’s into Marston’s portfolio.

The company also bought some pubs from Whitbread plc (LON:WTB) during the period for £13mln. In total, it opened 19 pubs and bars and acquired nine.

"We have achieved strong revenue growth and higher earnings, despite increasing employment and property costs,” said chief executive Ralph Findlay.

“Our business has been transformed in recent years with a significant improvement in the quality of both our pub and beer businesses.”

Ridley said while political and economic uncertainty is likely to continue, the group remains confident of achieving further growth in the year ahead as it continues to expand with further pub openings.

In the first seven weeks of the new fiscal year, it has seen like-for-like sales growth. Marston’s also reiterated its cost savings guidance of £5mln a year to offset higher wages and business rates.

Numis maintained its ‘add’ rating and target price of 104p, saying the 2017 results and the start of the new fiscal year are both in line with expectations.

“Marston’s acknowledges cost pressures but remains confident of below-inflation COGs (cos of goods sold) increases and delivering £5mln of efficiencies (50 basis points),” the broker said.

“Our assumptions of 0.5% like-for-like sales growth, D&P (Destination and Premium pubs business) margins -60 basis points are unchanged, but we reduce our effective tax rate to 17.5%. This results in a 1.5% earnings per share upgrade.”

Greene King's first half profits fall on higher costs

In contrast, cost pressures weighed on Greene King’s first half revenue and profits. In the six months to October 15, adjusted pre-tax profit dropped 8% to £127.9mln compared to the same period a year ago, while revenue declined 1.2% to £1.03bn. 

While Marston’s has been expanding, Greene King has been selling and closing pubs to offset estimated cost increases of £60mln this year.

The group is on track to deliver cost savings between £40mln and £45mln after selling 21 pubs and shutting three across the business.

Greene King is also investing in rebranding its pubs, improving customer offerings and launching more promotions to try and get more people through its doors.

“We think these initiatives have a good chance of succeeding and believe that Greene King’s high levels of cash generation should continue to underpin the dividend,” said Charles Huggins, analyst at Hargraves Lansdown.

“However, with the squeeze on household incomes showing little signs of abating, the near term environment looks set to remain challenging.”

Mitchells & Butlers cuts interim dividend 

Mitchells & Butlers has also had a hard time rising above costs pressures, with adjusted operating profit in the year to 30 September down 3.1% to £314mln despite a 4.5% rise in revenue to £2.1bn.

The company warned that it does not expect to declare an interim dividend in the current financial year but will “make an assessment of pay-out at the end of the year based on a full year of trading and development of the sector outlook”.

Net cash flow stood at £14mln, compared to outflows of £38mln last year, but the final dividend was lowered to 5.0p from 7.5p due to take up on its scrip dividend alternative.

Liberum reiterated a 'sell' rating and target price of 210p, saying: “We remain concerned about the capex/cash flow profile of the business (especially in light of the decision not to pay a dividend) but recognise the improving, broad-based like-for-like trajectory.”

Quick facts: Marston's PLC

Price: 123.5 GBX

LSE:MARS
Market: LSE
Market Cap: £815.55 m
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