Derek Pain: Marston's braced for a welcome pick-me-up
No Pain, No Gain
Saturday 08 August 2009
I have dipped a cautious toe in the water, although I am far from convinced that the stock market has come to terms with the tsunami that has devastated shares in the past two years.
However, I feel that in a few years time investors will berate themselves if they failed to take some advantage of the bargains that littered the investment scene in 2009. In general, shares remain cheap and it makes sense to at least add a few constituents to the no pain, no gain portfolio.
The stock market atmosphere is more optimistic than at any time since shares started to succumb to recessionary influences. Indeed, July was the best month we have experienced for some six years. Yet I am convinced that we are set to experience some nasty hiccups in the months ahead.
Still quite a few experts believe happier days are here. One is Ted Scott, director of UK Strategy at F&C Investments. He says: "If this is the first leg of a bull market, as I believe it is, it will continue to rise for some time".
A number of portfolio candidates have been under scrutiny in past months, including Marston's, the brewer, and Healthcare Locums, the health and care recruiter.
Marston's has the hangover look that afflicts most drink shares these days. Healthcare is riding high with its price around an all-time peak. The brewer, I believe, is oversold whereas much of Healthcare's appeal is already in the price, although the shares still have attractions. I have, therefore, alighted on Marston's – at 95p – and will continue to monitor Healthcare.
Marston's, with five breweries and around 2,200 pubs, has recently completed a £176m rights issue. The shares are probably still under the restraining influence of such a hefty cash call that more or less doubled the group's size. An interim trading statement this week was moderately encouraging.
Unlike many others that have successfully raided investors with various forms of cash-raising exercises this year, the brewer plans to spend much of the inflow on expansion, rather than significantly reducing its debt mountain.
Others in the leisure industry, such as nightclub chain Luminar, have also raised cash for expansion. They want to take advantage of recessionary valuations.
There is much talk about the record level of pub closures, estimated at five every day. What is often overlooked is that many closed pubs and bars later re-open and new outlets are still appearing, albeit at only two or so per week.
David Thompson, Marston's chairman, some years ago told me that Britain was hopelessly overpubbed. He was right. Furthermore, too many pubs are not in tip-top condition and many are too big. In addition they are unevenly spread, often cluttered together in more ancient parts of cities and towns, leaving vast stretches of residential districts with hardly a pub in sight.
Marston's, with brands like Pedigree and Brakspear, intends to open up to 25 pubs a year with the rights cash. It is clearly quite comfortable with its debt, much of it long-term.
At one time most pubs were owned by brewers. Then the Government forced the major groups to cut their pub estates. Such a short-sighted policy eventually led to the elimination of Britain's top brewers – they are all now foreign owned – and the creation of the pub companies that have been devastated by the recession.
The much-maligned vertical integration has proved much more robust in these sobering days and the remaining brewer-pub owners, reaping the rewards of production, wholesaling and retailing, are not doing too badly. Indeed I wonder if so many pubs would have closed if the old regime had not been decimated.
Of course, Marston's pub ambition played only a peripheral role in my decision to recruit the shares. It is often a good idea to buy shares in out-of-fashion industries and the booze business, in investment terms, is as yesteryear as brown and mild. But trading should be slowly improving (although the weather is not helping) and groups like Marston's are extracting all they can from a tough environment that will eventually improve. And don't forget brewers also get some benefit from cut price supermarket sales. Finally, despite the signalled dividend cuts, Marston's should remain a relatively high yielder.
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