Urgent BUY Alert: the first thing to do after lockdown
29th April 2020 |
Originally published under Growth Stock Network on 29th April 2020.
What’s the first thing you’ll do when you’re allowed out of lockdown?
Where’s the first place you’ll go in a social setting?
I’m going to suggest that going to the pub is probably up there in at least your top three things to do when out of lockdown.
I know it’s in mine. In fact, it’s probably the first one.
Meeting up with friends at the pub. Going for a nice meal at the pub. Having a proper pint at the pub.
And if we’re just lucky enough to get out and about from all this before October… even have a cold one in the sun!
I know it sounds mad. But the pub, going to the pub, meeting at the pub, eating and drinking at the pub is quintessentially British. When I have people visit from Australia or overseas, one of the things they all ask to do is to go to a “traditional British pub”.
It’s just one of those things. And while the pub industry has gone through its fair share of tough times over the last few years, there’s still a thriving industry for those able to make a fist of it.
The only problem is that in January this year, the game changed. And not in a good way. There’s a good chance that 100% of the pubs in the UK weren’t expecting to be forced to close their doors for weeks, months on end.
But that’s exactly what happened. And the impact it had immediately across the entire industry was devastating.
However, it’s not the death knell for the industry. In fact, when this lockdown ends and we unwind back to the things we used to enjoy, there are some industries that stand to bounce back hard.
And one of those industries is the pub and hospitality world.
My view is that the pent-up demand for simply going to the pub will be so strong that out of lockdown the resultant boom in the industry could more than compensate for this lockdown period.
And if that’s the case, there are a number of stocks that could benefit from a big rebound in the pub market.
One of those is your latest “bounce-back” recommendation which if you can stomach the volatility, the risk and uncertainty could be a star in a post-Covid-19, post-lockdown world.
Introducing your latest bounce-back recommendation, Marston’s Plc (LSE:MARS)
Marston’s is a name that might be familiar to you. It is one of the UK’s largest pub owners and operators. In addition to the pubs, it also has its own range of alcohol brands (mainly beers).
Marston’s, when you hear the name, might sound like a company that’s far too big to be a small-cap stock.
But due to the obliteration of its stock price thanks to lockdown, Marston’s is now a small cap stock with a market cap of around £229 million and a stock price of just 34.78p.
Considering on 2 January 2020 that the stock price was 129.60p, that’s quite some fall.
However, it’s easy to see why the stock price crashed.
On 20 March Marston’s made an announcement I’m sure it never imagined it’d have to make:
It is with great sadness that as of tonight (20.3.20) all of our pubs, bars and restaurants will close until further notice. This closure is a response to tougher Government measures to enforce social distancing and therefore reduce the spread of the Coronavirus.
This is the paragraph that signalled the start of weeks (months) of hardcore lockdown for the British public. It’s also the paragraph that put a grinding halt to the revenues of Marston’s.
Operating around 1,400 pubs and over a dozen beer brands across the country, the value of Marston’s was decimated when the government forced the lockdown of society during the coronavirus crisis.
It had to shut down its bread and butter. For me, that makes this investment case pretty clear cut.
When the lockdown, social distancing, self-isolation and forced isolation ends, and we are opened back up to society, my view is a company like Marston’s holds immense potential to “bounce back” as society moves back to a world like it was before the coronavirus crisis.
Of course right now, Marston’s is in a world of pain.
In an update released to market on 20 April. it noted:
In addition to the actions which have been taken to reduce the Group’s overall cost base, outlined in our previous update on 18 March, Marston’s Issuer PLC has also taken the precautionary measure of securing a waiver of a breach that might arise under the 30 day suspension of business and operations provision under the terms of the Group’s secured funding platform. The waiver has been granted until 29 May 2020 with an automatic extension to 15 June 2020 in certain circumstances.
That’s a good and a bad. The bad part is it’s close to being in breach of its debt covenants. But as it’s based on the government closing all pubs, it’s not unexpected its debt providers have given it a waiver on this.
Also, the waiver says to 29 May 2020 with automatic extension. We would take that to mean that if government-imposed restrictions are still in place to those dates, then the extension will kick in.
This means Marston’s still has some runway of a couple of months to ensure it’s not in breach of any covenants. Furthermore, it seems its relationship with those funding providers is pretty good.
And why wouldn’t it be?
We know Marston’s has been undertaking a debt reduction programme prior to the coronavirus crisis. In its 2019 Annual Report it explained a £200 million debt reduction programme over the next three years.
It also delivered a £101 million underlying before tax profit and a 7.5p dividend. Those are all signs of a healthy company. Worth noting is that those numbers were down from the year prior. However, revenues across all divisions, Destinations and Premium, Taverns and Brewing were all up year-on-year.
What stings Marston’s is that it’s got a pretty high debt bill each year (around £74 million) which makes sense for the company to try and reduce its overall borrowings.
And the borrowings tally is high. As per its 2019 annual report, as of 28 September 2019, Marston’s had £1.3 billion in borrowings. This is mainly offset by £2.3 billion in property plant and equipment assets. And its overall net asset position was £811 million.
So in that sense, even a completely failed Marston’s is still worth something. And if you look at its net tangible asset per share price, there’s about 90.6p worth of value there.
Considering the stock is trading at 34.78p, I think that alone makes Marston’s a steal at its current price.
Risks
But of course, the reason for the low trading price is the extreme uncertainty around what the pub industry will be allowed to do by the government.
If the government says pubs have to stay shut for the rest of the year, it’s going to quite likely mean some serious decisions need to be made for Marston’s.
Whether it’s offloading (selling) some of the beer brands, liquidating some of its assets… who knows. But it’ll need to find access to capital somehow.
The more likely scenario is that it will pull in more debt and use some of its property and plant and equipment as collateral. Or even more likely go to the market for a capital raising at a discount to the trading stock price.
Either way, there’s considerable ongoing risk to the company and the industry solely based on the uncertainty around how long we’re to stay in lockdown, how social distancing measures will remain in place and even restrictions on operating hours or capacity for venues like pubs.
All of this weighs on the price of Marston’s while we simply don’t know the outcome.
Financially, Marston’s isn’t flush with cash. Its assets are predominately illiquid. It receives rents from properties, which have also been relaxed which isn’t ideal, but the right thing for the company to do.
It does have a decent asset stable though, and as mentioned above, the net tangible asset value per share is significantly higher than its trading price.
If Marston’s looks to go to market with a capital raise, that would in effect dilute your shareholding.
Of course, this is all predicated on a worst-case scenario that lockdown and restrictions on the pub industry are long term and extend into the end of the year and even beyond.
However, we don’t expect that is going to be the case. It’s estimated that more than 457,000 people work in pubs and bars across the UK. It is a massive industry that delivers huge economic activity to the British economy.
Also, while pubs had been in a period of decline over the last decade, in 2019 for the first time since 2009, there was a total net gain in the number of pubs in the UK. It’s quite possible that just before coronavirus hit, the pub industry had been turning a corner and marching on to a new period of growth.
And that’s what we’re expecting from the industry and from Marston’s once we exit lockdown and head into a post-Covid-19 world.
When that happens, when Marston’s can once again generate revenues, can once again look to get its engines firing and get back to business, we think it’s primed to bounce back in a big way.
Even if it just bounces back to its net tangible asset price of around 90p, you’d be looking at around a 190% capital gain on the stock.
And should it head back to its January 2020 highs around 129p, that would be a massive 316% rise.
Of course, that’s in the event that the world does quickly return back to normal operations and the pub industry is again opened back up for business. But the uncertainty that lingers around everything right now makes this a very high-risk play as with our other coronavirus bounce-back opportunities.
Hence you should make sure you’re comfortable with the risk that in a worst-case scenario, and in the case the company’s funding partners can’t extend their covenants further, Marston’s may have to call in the administrators. That’s an extreme outcome, but it’s a real risk not just to Marston’s but the whole industry and all pub companies within it.
That’s what makes this so high risk. You should only look to invest capital that you are prepared to risk and prepared to lose if things only get worse and the company folds.
While we aren’t expecting that, you still need to consider it as a real tangible risk.
But if like us, you share the vision that perhaps Marston’s will weather the storm and see through this crisis, then maybe it’s primed as a real bounce-back all-star stock.
BUY Marston’s Plc [LSE:MARS]. Current price 34.78p with a market cap of £229 million. Buy-up-to 37.5p – we are not going to set a trailing stop/loss on the stock as we think long term Marston’s will weather the storm and we don’t want to exit a position should there be ongoing extreme volatility.
Action to take: buy Marston’s Plc
Ticker: MARS: LN
Price as of 29.04.20: 34.78 GBp
Market cap: £229.67 million
52-week high/low: 133.80p/ 18.40p
Buy-up-to: 37.5p
Regards,
Sam Volkering
Editor, Growth Stock Network
