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The pubs sector has not had a good few years. Having been hit hard by Covid-19 measures, operators are now contending with severe inflationary pressures and the cost of living crisis. The chief executive of the British Beer and Pub Association, Emma McClarkin, points out that more than 150 pubs closed in England and Wales in the first quarter of 2023; evidence, she says, that “extortionate costs [are] wiping out profits and closing pubs at a faster rate than the pandemic”.
Bull points
- Trading ahead of pre-pandemic levels
- Modest share rating
- Relatively low debt
- Investing more than peers
Bear points
- Cost of living pressures could hit sales
- Margins have fallen
But despite continuing headwinds, there are signs that things may have started to turn a corner. The outlook for the listed pubs operators has improved on the back of better-than-expected consumer demand and relatively modest share ratings. There are even some rays of light emerging from behind the dark clouds of energy and food costs. And while sales volumes remain down against pre-pandemic levels, these are now moving in the right direction. Analysts at HSBC said in a recent note on the sector that “demand is coming back more strongly than we had anticipated and the like-for-like sales outlook is above our prior expectations”.
Amongst the pubs stocks, Aim-traded Young & Co’s Brewery (YNGA), which has around 230 managed pubs focused on London and the south of England, stands out across a range of metrics. Analysts at broker Stifel, who think the company is “the industry gold standard”, note that Young’s is “the only pub company to have surpassed 2019’s profit level; delivered while investing more capital in its pubs estate than peers, and sustaining by far the lowest debt position”.
For those whose interest is already piqued, it is worth pointing out that Young’s has two share classes on offer. Most of the equity sits with the A shares, which is the stock we are recommending. But Young’s also has a quoted non-voting share class, which is available to investors. Both stocks carry the same rights to dividends and residual assets. The only difference between the two is that the non-voting shareholders can’t attend, speak or vote at, general meetings. Analysts think that these classes could be merged in the future. The situation at Young’s close competitor, Fuller, Smith & Turner (FSTA), is more convoluted still, with three share classes.
Solid trading
Young’s latest results, for the year to 3 April, underlined its relatively strong recovery from the pandemic. Revenues came in ahead of consensus analysts’ forecasts, despite an estimated £4mn hit from industrial action on the railways, and were 21 per cent higher than 2018-19’s figure. Statutory profits contracted by 14 per cent year on year as a result of property revaluations, but adjusted profit before tax was 4 per cent ahead of the £43.4mn posted in 2018-19.
While the adjusted operating profit margin fell by 240 basis points on the year to 14.4 per cent, Young’s managed to control costs well in a challenging environment. Management is “confident that margins will improve” in the short term, while analysts at broker Panmure Gordon forecast a 15.1 per cent operating margin for 2023-24. This is despite food price pressures and higher wage costs biting (the national living wage rose by 9.7 per cent in April and the Low Pay Commission forecasts another 7.1 per cent increase next year).
Utilities costs have been fixed until 2024, albeit annual energy costs were up by 82 per cent in the latest year as prices soared. Drinks contracts have also been fixed, food suppliers have been consolidated, and the company’s internal recruitment platform is helping it to save cash where it can on labour costs. Margins should also be helped by the company’s “drive for premiumisation”, which is something to watch.
Young’s recovery in the London market, central to the company’s fortunes given the number of its pubs in the capital and the potential impact on trade from higher levels of home working, has been particularly noticeable. On the year, like-for-like sales rose by 44 per cent in central London, by 29 per cent in east London, and by a third in the City. Broker Peel Hunt notes that Young’s has used events and its social media database of around 900,000 drinkers to encourage footfall.
So far, trading in 2023-24 has been encouraging. True, a like-for-like sales uplift of 4.8 per cent in the first six weeks compared slightly unfavourably with peers; Marston’s (MARS) and Mitchells & Butlers (MAB) both posted higher growth over comparable periods in April and May. However, Young’s growth rate has subsequently improved to a robust 10.1 per cent.
Low debt and high investment
Given the levels of debt taken on by pubs operators during the pandemic, and fears over gearing as interest rates continue to rise, Young’s strong balance sheet is a major attraction. Net debt (including lease liabilities) of £165mn looks manageable, representing a 1.9 times cash profit (see chart) and, according to management, that leaves around £111mn for investment. This debt level compares favourably with competitors – Marston’s and Mitchells & Butlers each have net debt loads of around £1.6bn – and provides leeway for future acquisitions and investment.
Meanwhile, the company’s £50mn syndicated facility has been extended until 2027 and the balance sheet position meant that annual dividends were bumped up by over 9 per cent in 2022-23. Balance sheet strength is fortified by the nature of the estate – as of April, 187 out of Young’s 227 pubs were freehold.
On business investment, Young’s is again out in front of competitors. According to estimates from Stifel, cumulative capital spending in the five years to March 2023 equates to about 57 per cent of 2022-23’s £369mn revenue, a higher level than at Fuller, Smith & Turner, Marston’s, JD Wetherspoon (JDW), and Mitchells & Butlers. The company acquired six new pubs in the latest financial year and spent £34mn on its existing estate.
An attractive rating
City analysts rate the shares at just eight times EV/Ebitda (enterprise value to earnings before interest, tax, depreciation and amortisation), according to consensus forecasts from data provider FactSet. This is undemanding, given the group’s performance and prospects, and is lower than the five-year average of 10 times. The shares also trade almost 40 per cent below their average price/earnings ratio. The 19 times earnings multiple is lower than for listed competitors that Young is outperforming, such as Wetherspoon (23 times earnings) and Fuller, Smith & Turner (21 times earnings).
Peel Hunt analysts, who raised their pre-tax profit forecasts by 7 per cent on the back of Young’s latest results and note that the shares trade at a significant discount to net asset value, conclude that “given the valuation, the pace of London’s recovery and Young’s outperformance, we view this as a core sector holding”. We agree – it’s a good time to raise a glass to the company’s shares.
| Company Details | Name | Mkt Cap | Price | 52-Wk Hi/Lo |
| Young & Co.’s Brewery, Class A (YNGA) | £619mn | 1,175p | 1,290p / 863p | |
| Size/Debt | NAV per share | Net Cash / Debt(-) | Net Debt / Ebitda | Op Cash/ Ebitda |
| 1,238p | -£165mn | 1.9 x | 91% |
| Valuation | Fwd PE (+12mths) | Fwd DY (+12mths) | FCF yld (+12mths) | CAPE |
| 18 | 1.9% | – | 28.8 | |
| Quality/ Growth | EBIT Margin | ROCE | 5yr Sales CAGR | 5yr EPS CAGR |
| 14.2% | 5.8% | 5.7% | -3.8% | |
| Forecasts/ Momentum | Fwd EPS grth NTM | Fwd EPS grth STM | 3-mth Mom | 3-mth Fwd EPS change% |
| -1% | 7% | 5.1% | 11.0% |
| Year End 31 Mar | Sales (£mn) | Profit before tax (£mn) | EPS (p) | DPS (p) |
| 2021 | 91 | -43.5 | -66.6 | 0.0 |
| 2022 | 309 | 40.3 | 42.6 | 16.8 |
| 2023 | 369 | 45.1 | 64.2 | 20.8 |
| f’cst 2024 | 386 | 48.2 | 62.8 | 21.6 |
| f’cst 2025 | 405 | 51.6 | 67.1 | 22.7 |
| chg (%) | +5 | +7 | +7 | +5 |
| source: FactSet, adjusted PTP and EPS figures | ||||
| NTM = Next Twelve Months | ||||
| STM = Second Twelve Months (i.e. one year from now) | ||||
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