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Barchid...unpaid rent is less of an issue as the pub can be converted to a foundation agreement where Marston’s take control and 80% of the pub income is taken rather than rent...like for like they typically are more profitable. On the whole this balances out and is a bit better.
You are quite correct about the estate valuation, particularly the big new builds...
Hoolicat
Great input again, many thanks.
As you say a chunk of change but rather less than I was fearing, thankfully.
The real issue is, of course, if the tenants can pay the rent. That is a liability we have no solid numbers to evaluate but my suspicion has been, ever since the sale of a bunch of pubs late 2019 at a nasty loss to book value, that the estate is somewhat aggressively valued, especially as that followed the abortive sale of "pitcher & piano" bars due to no interest at the offered price.
Hi Barchid, I think you are asking for my input on tenancy debt and beer wasted? I wouldn’t give info that is not in the public domain, but debt has been relatively low and not a big impact. This is mainly due to the ability to switch a tenancy into a retail or foundation (types of franchise) agreement which tends to mitigate business failure cost as these retail agreements are more profitable like for like for the low turnover, wet led tenancies. So debt right off has been fairly small. It that was in a stable, well controlled environment where agreement conversion could be proactive. The current situation will be more reactive and need to be faster paced if tenancies start faIling...debt will rise from unpaid rent and the vacancies hard to fill with competent operators. I would estimate that the tenancy and leased division would be £1million behind budget for the whole year, conservatively...i.e. this is the profit loss compared with if all was normal.
The beer loss due to wastage...if you assume 10 days stock holding, with draught beer being 75% of the wet turnover, then you are looking at £2k per pub at cost as a general average for T&L pubs and also the franchises...For 900 pubs or so. The Managed pubs have a lower % of draught beer but higher stock holdings, a guesstimate would be £4K per pub for 600 pubs...a chunk of change. I would stay clear of any specials involving steak and ale pie...
Fairdealer
First the motel piece, certainly variable in quality, which one can understand up to a point in this climate but could mean a general staff/skills upgrade is needed to maximise occupation of rooms.
My only experience in one was in Devon, pretty dire, even on the loyalty card it still rankles....
WRT the trade receivables, you have confirmed, but in greater detail than I had knowledge of, the possible iceberg we might meet in some months time.
Hopefully not but it is best to have eyes wide open.
Thanks for your response, appreciated.
Barchid
Stayed at the same motel
The experience was a bit like the Curate's Egg.
I'll start with the best part. The Breakfast team ( yes breakfasts were on this time), were helpful cheerful, attentive and wearing masks. On the contary the Receptionist on Friday night was anything but friendly, remained sedantry and when presented with my confirmation Booking email insisted on me giving my name. Presented my Privilege card but am not sure whether or not the discount was given ( will wait for my Visa statement). Used the electronic card to access the room, in separate block to Bar and restaurant , however even though kettle, cups etc were present NO tea, coffee, milk etc. Did not complain having just driven over 250 miles. Did understand later, the receptionist should have given a sealed bag with tea, coffee etc.
The first impression always sets the tone of the establishment even though the Breakfast team performed well, the receptionist gave me a bad impression.
If, as promised, Marstons are to provide Operational Excellence, serious staff training must happen, focusing on Customer care particularly Front of House staff.
Given the motel is in a good location and a Friday night I estimate the Bar and Restaurant was no more than 40% occupied and outside tables possibly 50% occupied. I asked staff on Saturday morning how trade is since re-opening, answer "slow but we are getting there"
In regards Tenancy arrears, aware as you state overdue rents etc have been bundled together up to the end of year 2018.
There can be no doubt that number is going to explode during the current year, we are unlikely to know precise figures until year end accounts are published. Had hoped Hoolicat may have been able to give us a clue? I will continue to dig but am under no illusion the numbers will be revealed yet.
I do not know but it is conceivable disagreements are ongoing between Landlords and Marstons regarding payment of Beer tipped down the drain. This in itself brings up another very important liabililty...alcohol tax. HMRC require payment of Alcohol Tax at point of manufacture when Bottled or Casked and not at point of sale as some think. Am pretty sure HM Gov have granted a tax holiday which means at some point the Tax will be payable as will other Taxes . The latter element will effect most if not all Trading company's many will have used these funds to survive, hope Marstons have it locked away.
A lot of bad and potential bad news is priced in, however I suspect there are other nasties lurking.
Fairdealer
Firstly did you have a better experience in the Motel this trip than you did last trip, presumably a different one ?
Secondly, you are good at these things regarding tenancies etc but if I am not mistaken between 2012 to 2018 the average of trade receivables considered overdue was around 25% ?
Presumably this is going to be a very different number this year, I know they have modified their banking agreements recently but who is going to pay, for instance, for all the old beer which was tipped away, tenants or Marstons ?
Is this something you have looked at recently ?
Clearly there is a lot of bad news built into the price already, could this come as another nasty surprise or am I misunderstanding something ?
Fairdealer.
An interesting read.
Visited a Marston's pub today and very much a mixed bag. They certainly seem far from operational excellence, at least regarding the customer-facing side (lagging behind even Wetherspoons ! judging from this one sample), but their offering of drinks is definitely a strong point. There wasn't a single beer at the bar that someone could have surprised me with and I wouldn't have enjoyed drinking (no Carling in sight praise the Lord!). Interestingly more than half their beers were unavailable, including Pedigree. Not sure if this is a good sign (unexpectedly high demand) or cause for concern.
Regarding a few other points.
New Zealand were rather blessed in having the virus occur in their warmer months, and also in being very sparsely populated (even Auckland is rather modest). The virus seems to have hit hardest in very densely populated areas with poor air quality (the likes of Milan and New York). In terms of the UK (the South-East at least) we are more analogous to the Netherlands, Northern Italy and USA's Northeastern Seaboard. Comparing with them is probably a better prism to view UK's results through.
Covid mutating rapidly: Though this sounds scary at first, it is true of many viruses and most often results in them becoming more benign. This is actually in the viruses' 'interests' as dead hosts are no good for propogating itself. This is partly the reason why most deadly diseases stem from bacteria and not viruses. I think it is possible Covid is still with us in a few years and tolerated/mitigated much as influenza currently is as we come to understand it, and evolve best practices.
The gap before then is the rub. I am quite bullish on Marstons long term prospects IF it can survive, and currently I believe so. Partly as I believe the next few years will see high inflation, and this benefits the Marston's shareholder two-fold. Firstly, inflation raises asset prices (though this is true for all stocks). Secondly, it effectively shrinks our debt-pile. Further, should we find Covid is gone/vaccinated for, we are still likely to be in a lengthy recession. Traditionally pubs are seen as a somewhat safe-haven in troubled times.
I puzzle a lot over this company, I think that's part of it's attraction to me :)
Hoolicat’s contribution is particularly interesting and although total collapse is possible it does emphasise how debt could overwhelm Marstons.
Hoolicat made mention of the Pub business bleeding cash, it would be interesting to know how the company is handling Tenancy Arrears and it’s level?
AIMO DYOR
With apologies to the Bulls.
Have just returned from a trip to the Midlands where I did stay at a Marston’s Motel, more of that later.
Have caught up with the many interesting posts.
The whole market is still in uncertainty, COVID 19 is not going away in a hurry and the hope a vaccine will arrive needs to be considered with caution. The annual Flu virus mutates and from what I am hearing COVID mutates at an alarming rate.
Lockdown has damaged the economy beyond recognition, easing of rules is NOT being observed, many believe too hell with it I am going to enjoy myself. These are ignorant to the damage this socially selfish attitude is having on society and the economy generally. Many socially responsible people are afraid to go out, for obvious reasons.
Comparitors are being made between Australia and the US. Just look over the Tasman where New Zealand enforced a total lockdown/lockout and their situation is clear for all too see. We cannot turn the clock back but severe pain for a short period would have been worthwhile to then emerge in a stronger position rather than the prolonged hiatus we seem to be in. Too many on furlough have a good excuse with COVID, too not return too work convinced the Government will keep them.
As stated many, many weeks ago there is worse to come in Markets.
The hospitality sector is being seriously impacted, those with healthy reserves are going to survive and pick up cheap assets.
Having sold the Brewing business in it’s entirety for £250m in April 2019, Fullers were able to return a special dividend to Shareholders, and have recently acquired a group of Prestigous Hotels. Fullers still have a healthy balance sheet and make it plain, are on the lookout for further Quality Hotels/Pubs.
At the moment Whitbread have a healthy balance sheet, having recently raised £1b through a RI, and it is an open secret are in acquisitive mood.
These 2 companys demonstrate the benefit in having relatively low borrowings.
Marstons expect to receive £239m in Q4 which will pay down debt currently over £1.3b.
Then according to the Company’s mission statement, the Strategy is to focus o Operational Excellence within the Pub and Accommodation business, plus further debt reduction.
Too achieve Operational Excellence will require funding. It is difficult to predict levels of profit from the JV which will satisfy this requirement. This leaves Asset disposal and or Additional funding.
Asset disposal under the terms of the JV could be Marston’s Achilles Heel, but could be part of the solution.
Raising funds through a Rights, may be unpopular but it may be the only untapped resource which enable the BOD to deliver on it’s strategy. Having pulled capital works in July 2019 and now committing £90m this year for Enhancement/Capital works , shareholders should be asking where is the money coming from?
Remember the company have £350m loans due for repayment in 2023.
contd
All very good and valid points Hollicat. I’d like to think that the majority of that is already factored into the current SP, it makes most sense overall + Covid factor.
So the whole play here is whether or not they can carry on along the lines of the original plan and then also make it profitable as they go. If so up we go, if not we shall see. Blue sky has to outweigh the grey at these levels though, just like before all this the grey possibly outweighed the blue when you consider the overall picture was pretty much the same minus covid factor.
A lot of bargains to be had all around, hopefully these turn out to be one of those. Have a pleasant day
Feel free to tear me down, I won’t be offended! I’m not sure what the contradiction is? Managed pubs profit will be severely impacted but still more that the brewery in actual terms.
Your point re. adapting to the new world is a good one, which is another good reason to be cautious with Marston’s. The decision to sell the brewery business and JV with Carlsberg was made last year, well before the Covid train hit. At that time the strategy would been seen as focusing on the highly profitable managed pubs, converting tenanted and leased pubs to franchise and selling the less viable ones, and releasing cash from the brewery side for debt reduction via the JV. Then the world changed...the brewery/free trade side could be seen as a lifeline whilst the pubs were shut. Even with the pubs open there is going to be severe profit downside as per my previous missive. Also you might wonder what Carlsberg management are thinking now, there partner is suddenly looking rather sickly, maybe best to finish the brewery takeover job?
@hoolicat
Interesting opinion however you contradict your own views within your conclusion.
Not tearing you down but interesting that you see the pub side as more profitable than the brewery side which as stated is much less profitable with tighter margins however it’s then a negative that they are taking a large sum on that whilst also maintaining a 40% stake in the combined JV with a bigger player moving forward. Oxymoron right.
Businesses are going to have to adapt and change to the climate moving forward. If successful SP will be higher, reverse and lower which then brings us back to current day.
Place ya bets...
@Hoolicat
A most insightful, eye opening post, whether you prove to be right or wrong on end result matters not, but you have added a depth of view which seems compelling to me, probably not to many others. Thank you for sharing your thoughts with us.
I was never a bull of the sale of most of the brewery as the debt pile and a string of diverse & in some cases, disparate, pubs did not seem a terribly attractive prospect.
I had posted several times over the past couple of years that it was quite possible an overseas company could take out Mars, but post covid Carlsberg saw an opportunity to get what they really wanted and struck. Leaving us with something altogether different, and my worry is that the estate was rather fully valued even before covid.
I’m not holding at the moment, but have invested significantly in the past, also I am an ex-employee at a senior level in L&T part of the business...so here is my pennies worth...
The Leased and Tenanted side of the business is going to be in deep trouble, pub failures will be hitting the rent line and volumes (beer sales) deeply impacted at a level far higher than post 2008 which hit profits hard. Alternative models will be used, i.e franchises, but this will still hit profit hard. This is £30 million per year profit u Dee threat.
The managed side will be trading at best at break-even with the reduced sales capacity, Marston’s managed are predominantly value food led, which needs turnover...and now customers will want high quality, good experiences when eating out (because if your going to make the effort you want it to be a good one) which Marston’s are not strong at.
In other words Marston’s pub side of the business is going to bleed money, and with further lock down and the end of summer (no garden trade), this is not going to improve until spring next year. Managed houses represents £60 profit under threat...
Which leaves the beer co./brewery side of things, which whilst strong is nowhere near as profitable as the pub side, much less margin...and of course they have sold this off, and as previously stated they will be the junior partner here.
So my view is that Marston’s will collapse within the next 6 months as we know it, the brewery will be entirely taken over by Carlsburg and the pub side will be broken up to venture caps like GK and Ei have been...
There may be opportunity to invest for break-up/takeover news, but I have no idea what that number might be...and yes the debt is enormous, the money from the JV, assuming it goes ahead ( the delay is a red flag) will not clear the debt as hoped but shore up losses...
Feel free to critique, I still have many friend in this company and wish it well, but I fear the worst...