UK Edition
Pubs have faced arguably their most challenging trading conditions in living memory since the emergence of Covid. Lockdowns caused widespread closures that put huge pressure on their finances.
Now pub operators such as Young & Co’s Brewery, a holding in Questor’s Inheritance Tax Portfolio, face a new threat. High inflation has the potential to prompt a significant reduction in real incomes – and that could have a material impact on non-essential spending over the coming months.
Encouragingly, the company has strengthened its balance sheet over the past year. This process was significantly aided by the sale of the vast majority of its tenanted estate to Punch Pubs for a total cash consideration of £53m. The sale allowed Young’s to cut net debt by about £108m, so that it stood at £140m at the time of its half-year results in September.
The business now has a net-debt-to-equity ratio of just 21pc. Meanwhile, net finance costs were covered more than five times in its most recent half year. This is in spite of coronavirus restrictions remaining in place for a substantial part of the period.
The company has said it will remain in compliance with 2022 financial year debt covenants with its lenders even under its “more severe” scenario regarding Covid restrictions. Its annual results are due to be released on May 19.
The sale of most of its tenanted estate means the company has greater capacity to invest in its managed pubs. Indeed, it plans to conduct a major capital expenditure programme to upgrade existing locations and this should strengthen its competitive advantage.
The disposal also provides additional financial flexibility to make acquisitions should opportunities become available in what remain challenging conditions for the wider industry.
Any purchases will be made by a refreshed management team. Young’s announced last month that its chief executive, Patrick Dardis, would be replaced in July by its current chief operating officer, Simon Dodd. Given that the latter was recruited three years ago with succession planning in mind, Questor does not view the change as a major risk to the group’s outlook.
Indeed, the biggest difficulty to face the company is overcoming the effects of a decline in real incomes prompted by rising inflation. This could cause a further worsening in consumer confidence, which has already declined to its lowest level in 16 months.
The end result could be lower spending on discretionary items, which may hold back the stock’s recovery prospects in the short run.
Since they joined Questor’s IHT Portfolio in October 2017, Young’s shares have proved to be a disappointment. They have declined by 31pc, which is largely due to the virus: they currently trade 39pc lower than their pre-pandemic level. They have also come under pressure, along with the wider sector, in recent weeks as the consumer outlook has deteriorated.
Given that this column generally takes a long-term view of its holdings, and the company has made substantial progress in strengthening its balance sheet, it will remain part of our portfolio. Hold.
Questor says: hold
Ticker: YNGN
Share price at close: 725p
Update: TinyBuild
The most recent addition to our Inheritance Tax Portfolio, TinyBuild, released annual results last month that were well received by the market. The video games publisher and developer reported a 39pc rise in revenues and a 63pc increase in pre-tax profits. This has prompted a 25pc rise in its share price in the past month.
The company also announced an “acquihire” earlier this week of Demagic Games, which operates in Ukraine and Russia and with which TinyBuild has been working for more than a year. An “acquihire” is an acquisition that is made primarily to recruit a firm’s employees.
Clearly, TinyBuild’s exposure to Ukraine means that it faces a very uncertain future. As a result, further share price volatility seems likely after its 27pc decline since it joined our portfolio in May 2021.
We will continue to hold the stock thanks to its long-term growth opportunities. But we view it as a relatively high-risk investment. Hold.
Questor says: hold
Ticker: TBLD
Share price at close: 191p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.