Questor: Britain’s pubs could be bust ‘in days’ thanks to coronavirus. Must we sell?

Questor share tip: the outlook is bleak indeed but before we crystallise any losses we must look at their balance sheets

Richard Evans 18 March 2020 • 6:00am

It's time for a brutal truth. At times like this there are really only two types of company: those that will survive the crisis and those that won’t. Our most urgent task is to identify any of the latter among our picks and urge readers to sell them while they still have some value.

Only then can we turn to the more positive task of identifying the oversold among the first group.

Here is a second hard fact of stock market life: the survivors will very often be those companies with strong balance sheets – either no debts at all or borrowings low in relation to their assets, or interest payments low in relation to earnings.

If you are a company that has significant debts and your income is about to be clobbered by the effects of the virus crisis, your future is shaky to say the least.

Questor has looked back through its selections and tried to identify those most at risk. Mercifully, there do not appear to be that many.

We are certainly anxious about the pub groups we have tipped: Marston’s, City Pub Group, Mitchells & Butlers, JD Wetherspoon and Fuller, Smith & Turner. We will look at them, in a rough-and-ready way owing to our limited space, in today’s column and, in a break from our normal sequence, look at other potential danger areas tomorrow in place of our investment trust bargains.

As this newspaper has reported, trade groups have warned that pub firms could be forced out of business “within days” as a result of official advice to the population at large to avoid bars, restaurants and the like.

The danger is that, should customers indeed desert pubs and their income dry up, the companies behind them will struggle to meet costs such as lease repayments and could have to enter administration or some other form of insolvency.

The question then is how much would be left for shareholders at the end of the process, as the current economic circumstances suggest to Questor at least that achieving the “book value” of pub groups’ assets, largely property, might be difficult.

To judge by the share price, Marston’s is on the shakiest ground. Since we tipped the firm in June last year the shares have collapsed by about 81pc from 114.7p to 22.2p.

The firm’s estate was valued at £2.1bn in last year’s annual report, while net debt was £1.4bn. This implies some margin of safety and we will hold.

City Pub Group’s shares have lost about 75pc of their value since our tip in August 2018. The firm’s net debts of £30m in June last year look high relative to profits of £1.9m for the six preceding months but less so next to assets of £119m. Again, we’ll hold.

Mitchells & Butlers has assets, largely property, of £4.9bn and net debt of £1.6bn. In a reflection of this margin of safety the shares have held up better: they have lost about 45pc since our tip, in the same column in August 2018. Hold.

JD Wetherspoon’s assets in July 2019 were £1.5bn, according to its annual report, while net debt was £737m. The shares have lost 56.6pc since our tip in November last year. Hold.

Fuller, Smith & Turner sold its beer business in April last year, which cut its net debt from £245.2m at the time of its annual report to just £23m at the interim stage in September, although the figure is £119m under new “IFRS 16” accounting rules. The company described this as a “very healthy balance sheet position” and we are inclined to agree. Hold.

Near misses

We have had a couple of lucky escapes in the pubs and dining sector. We tipped Greene King several times, most recently in that same column in August 2018, and cemented a gain of 76.4pc when the firm fell to a takeover bid in October last year.

Shares in Restaurant Group had already made a 29.4pc loss for us when we gave up on them at 252.8p in November last year but have since fallen to 25.5p.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.