Marston's: Slow brewing stock with good upside

Pub operator and brewer - Marston’s (LON: MARS) – has a fair bit going for it. It has seen a steady uptick in financial performance in the past few years and the latest trading update shows further continuation of the trend. But that is not the full story. There are notes of caution here as well.

For one, the company is in debt reduction mode, which has implications for its future expansion. And also, the current economic climate in the UK is uncertain on account of the Brexit, which can impact Marston’s future sales. The question then is: With both pros and cons to the story, which side is the balance of risks tilted on? Let us consider each factor in detail.

Growing financial strength

First, the financials.

Marston's has witnessed steady growth in revenues going by recent trading updates, averaging at 7.9% for the past five years. In 2018, it did particularly good business with an almost 15% increase in revenues to £1.4bn.

The underlying operating profit also rose appreciably at 4.6%, to £182.5m, significantly faster than the five-year average growth of 1.6%. Strong performance continued into January 2019 as well, showing especially buoyant growth during the Christmas fortnight. The company, currently valued at around £600m, is also carrying a dividend yield of over 5%.

Ensuring sustainability

So far so good.

Marston’s has also a debt reduction plan in motion, which will ensure its long term financial stability. It aims to cut debt up to 2023, which has risen on an average by 3% every year since 2014 It is worth underlining, though, that the situation is hardly out of hand. The debt-equity ratio is 1.6x, which is not alarming by any standards.

Checks on expansion

While this plan is certainly worth its while, it comes at the cost of new investments. Non-core assets worth £80-90m are also expected to be disposed of towards the same end. There could be revenue implications from these actions, but this scenario is yet to play out fully. There is every possibility that Marston’s becomes a more efficient machine as a result, but there could be a hit to revenue numbers too.

Uncertainties abound

The more immediate cause of concern, however, is Brexit. Marston's CEO, Ralph Findlay, in the last trading update mentioned: “We operate in increasingly uncertain times from a political and macro-economic perspective and, as such, we remain cautious about the potential consumer outlook until there is more clarity.”

Given Marston’s operation in the consumer discretionary segment, this would be no surprise, and growth in business can well slow down as a result.

Conclusion: Moderate risk

On balance, however, the dividend paying stock has more going for it than not. But considering the environmental uncertainties of the near future and the fact that its share prices have maintained an almost flat trend line over the past one year, investors have plenty of time to buy the stock. Good company, but no rush.