Event Led Socialising And Digital Engagement Will Drive Long Term Pub Estate Upside

Catalysts

About Marston's

Marston's operates a predominantly freehold estate of local pubs across the U.K., focused on high-margin, cash-generative hospitality.

What are the underlying business or industry changes driving this perspective?

• Accelerated rollout of proven high returning formats such as Grandstand and Two Door across roughly three quarters of the estate should convert under-earning pubs into higher throughput venues, lifting like for like revenue growth and site level EBITDA.
• Ongoing shift in consumer demand towards experiential, event led socialising and live sport, supported by a major football tournament and a structured events calendar, is likely to sustain visit frequency and upselling, underpinning top line growth and premium pricing.
• Embedded digital capabilities, including the order and pay app and data led revenue management, are set to deepen customer engagement and increase spend per head while driving labour efficiency, supporting both revenue and EBITDA margin expansion.
• Continuing deleveraging from strong recurring free cash flow and a largely fixed cost financing structure can reduce interest expense and risk, paving the way for a re rating of equity value as leverage moves below four times and earnings quality improves.
• Systematic labour productivity gains and procurement efficiencies in food, drink and energy, building on already delivered savings, provide a structural cost advantage that should offset wage and tax headwinds, supporting further net margin and earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Marston's's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.0% today to 7.8% in 3 years time.
• Analysts expect earnings to reach £75.3 million (and earnings per share of £0.11) by about December 2028, up from £71.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, up from 5.1x today. This future PE is lower than the current PE for the GB Hospitality industry at 14.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Marston's growth strategy leans heavily on event led trading peaks and major sports tournaments. However, a long term shift in consumer behavior towards at home entertainment or lower frequency pub visits could reduce like for like sales growth and pressure revenue.
• The business model depends on sustained labor productivity gains to offset rising National Living Wage and National Insurance. Yet a structurally tight U.K. hospitality labor market or further wage regulation could outpace efficiency improvements and compress EBITDA margins.
• The plan to accelerate format conversions and maintain capital expenditure at 7% to 8% of revenue assumes consistently high returns on invested capital. However, any deterioration in returns from Grandstand and Two Door rollouts or weaker demand in local catchments would dilute investment yields and weigh on earnings growth.
• Despite progress on deleveraging, net debt at 4.6 times EBITDA and securitized financing structures leave the company exposed to higher cash tax outflows and limited balance sheet flexibility over time. This could cap free cash flow available for shareholder returns and slow equity value accretion.
• The estate is highly exposed to U.K. discretionary spending and to structural trends such as health consciousness and lower alcohol consumption. A prolonged squeeze on household incomes or regulatory changes on alcohol duty and business rates could undermine pub visit frequency, erode net margins and ultimately reduce earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.76 for Marston's based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.85, and the most bearish reporting a price target of just £0.65.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £968.1 million, earnings will come to £75.3 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of £0.57, the analyst price target of £0.76 is 24.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.