UK Edition
Join Questor’s pub crawl as we go in search of the sector’s most attractive stocks
Our short series of columns with a summery feel continues this week as Questor takes advantage of the weather to embark on a pub crawl – not to test the beers on offer but to see which pub companies’ shares are worth a punt.
Britain has about half a dozen listed pub companies if we discount the smallest operators. Here, with the help of detailed research from Berenberg, the bank, and one of the investors in the sector, we summarise what they can offer readers.
Fuller, Smith & Turner
Fuller’s is a “premium” chain likely to “continue outperforming” thanks to its significant investment in “differentiated offerings that tap into consumer trends towards premium alcohol consumption”, Berenberg’s analysts said. The bank prefers pubs that downplay their membership of large groups and come across as true “locals”.
In Questor’s experience, Fuller’s is stronger in this respect than some rival groups, whose estates can be heavily branded with generic names that push the individual pub’s identity into the background. Berenberg rates Fuller’s a buy with a price target of £12.50.
City Pub Group
It takes the same view of the City Pub Group, its favourite in the sector, although we should point out that the bank provides City Pubs with investment banking services. The share price is also currently above its price target of 210p.
Ken Wotton, a fund manager at Livingbridge, holds the shares. He said City Pub Group appealed to “a broad demographic as a destination pub” while its “freehold-focused roll-out strategy” maximised flexibility and its ability to make money from additional space for hotel rooms.
He said the firm had an experienced management team led by Clive Watson, the executive chairman, who built Capital Pub Group with a similar strategy. Questor rates this the best bet.
Marston’s
Marston’s is executing its strategy well against a challenging market backdrop, according to Berenberg.
The bank said that over the past five years the company had disposed of more than 700 pubs and reinvested the proceeds into more than 100 quality new-build pubs, predominantly located around new housing developments where competitive pressure was less intense.
It rates the shares a hold with a 105p price target. They look cheap on a price-to-earnings (p/e) ratio of 6.6 and a yield of 8pc.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
JD Wetherspoon
The researchers at Berenberg said they expected sales growth to remain strong at Wetherspoon’s thanks to its innovative smartphone app and “clear focus on price leadership”. They did point to earnings growth being mitigated by rising costs, however. With a p/e of 17.5 the shares are nowhere near as cheap as Wetherspoon’s beer, and Questor is inclined to avoid them.
Mitchells & Butlers
Another chain threatened by rising costs, with business rates a significant problem thanks to its bias towards the South East. It has a history of underinvestment in its pubs, resulting in “bottom-of-the-class performance” in Berenberg’s words, but is now refreshing its estate more frequently. The bank said the balance sheet looked “stretched”. The p/e is in single digits, however. No more than a hold.
- Questor archive: telegraph.co.uk/questor
Greene King
Questor has looked at Greene King before, most recently in April when we rated it a buy. Among its strongest attractions is a dividend that currently equates to a yield of 6.9pc and looks safe thanks to comfortable coverage by earnings. Still worth buying.
Young’s
This is another stock that we have tipped in the past, this time for our Inheritance Tax Portfolio in view of Young’s Aim quotation. It remains a hold. One other listed pub group is Shepherd Neame, but Berenberg described its shares as “super illiquid”.