The death knell for the British pub has been sounded many times. Pub numbers have dwindled from around 75,000 at the start of the 1970s to 45,000 now. Myriad pressures are behind the closures, including soaring costs, rising taxes, competition from supermarkets and lower levels of alcohol consumption among younger age groups.
A new government proposal to ban smoking in pub gardens, with stronger rights for workers, has alarmed publicans who argue the outdoor smoking plan will trigger another industry call for last orders.
Labour’s motivation is public health, echoing the Cameron-Osborne government’s soft drinks sugar levy in 2016 which was designed to tackle issues around childhood obesity. That forced soft drinks manufacturers to reformulate their products (or whack their prices up), and it helped cut sugar levels in children’s diets.
But publicans argue the measure will put a dent in profits, not smoking rates, and are pleading with the government to rethink the planned measure. While the smoking ban is a tricky new challenge, Britain’s listed pub companies are not in bad shape, with most reporting good momentum in food and drink sales.
If anything, they are evidence that a tough market can help incumbents grow stronger as newcomers are deterred, and that solid propositions can trump adversity. Young’s offers an appealing mix of beer and bedrooms, Mitchells & Butlers manages well-known restaurant and pub brands, Marston’s has sloughed off its brewing business to focus on its pubs, while Wetherspoon’s commitment to low prices means its customers keep coming back.
HOLD: JD Wetherspoon (JDW)
JD Wetherspoon announced its first dividend in five years after a strong year from the pub chain, writes Christopher Akers.
Site disposals helped adjusted pre-tax profits rise by almost 75 per cent.
Like-for-like sales were up 7.6 per cent against last year, as bar sales rose 8.9 per cent. Sales came in 16 per cent ahead of pre-pandemic levels, while robust post-period growth of 4.9 per cent over the nine weeks to September 29 was nicely ahead of the 2.9 per cent managed-pub sector growth reported in the latest CGA RSM hospitality business tracker.
Adjusted operating profit rose 30 per cent to £140mn, supported by lower depreciation and amortisation charges, while the margin improved by 130 basis points to 6.9 per cent.
Wetherspoon sold 18 pubs in the year and terminated the lease on a further nine sites, which resulted in a cash inflow of £8.9mn. The company thinks it has the potential to operate about 1,000 UK pubs, compared with 800 sites at the year-end.
Statutory profits fell by a third on a combination of higher operating costs and lower finance income. Inflationary cost pressures were evident in the 7 per cent increase in wages and salaries, while the £81.6mn drop in finance income was due to movements related to the company’s interest rate swaps.
Debt (excluding lease liabilities) sat at £660mn at the year-end, up around £20mn from the previous year but almost £150mn down on the pre-pandemic position. Higher-than-usual spend on the existing pub estate was evident in the movement in investment from £47mn to £83mn year on year.
Chair Tim Martin, never one to shy away from comment, turned his ire towards media reports of potential licensing law reform and a “slightly daft” academic proposal that pubs should sell beer in two-thirds of a pint to reduce alcohol consumption.
In the view of Shore Capital analyst Greg Johnson: “It is difficult to reconcile why Spoons should command such a premium rating to its pub peers”, given the context of the company being “a net seller of pubs, a normalising in LFL sales trends and leverage ratios arguably higher than optimal”.
The shares trade at 14 times forward consensus earnings, half the level of the five-year average but pricier than the ratings on offer at listed rivals such as Mitchells & Butlers. Management guided, rather vaguely, for “a reasonable outcome for the current financial year”.
BUY: Volution (FAN)
Ventilation specialist Volution has had many reasons to celebrate in the 10 years since its IPO, but its shares retreated from a multiyear high even though its annual results were in line with market expectations, writes Maisie Grice.
Ultimately, the group registered an 11.7 per cent rise in adjusted operating profits to £78mn on a 120 basis point increase in the underlying margin. This was achieved despite slowing demand for new-builds in the housing market and high interest rates across several countries.
Operational progress is reflected in the cash conversion rate of 107 per cent rate, which enabled Volution to bring its net debt leverage to the lowest ratio since admission, while developing awareness of black mould and tighter regulations for social housing saw the UK residential business deliver its strongest growth to date, increasing by 17.1 per cent to £105mn.
Volution maintains confidence in the UK market’s future, as it expects the Labour government’s new laws surrounding social housing to have a material impact. However, the strains in the original equipment manufacturing (OEM) market were evident throughout the year.
Organic growth in continental Europe was broadly flat, with faltering demand in Germany a reflection of the challenges facing the region’s largest economy. By contrast, the outlook for the ClimaRad subsidiary in the Netherlands remains positive due to rising demand for low-carbon refurbishment.
Momentum in Australasia decreased due to softer demand in New Zealand, as the performance of the DVS business (acquired in August 2023) fell short of expectations. The scale of the regional business will change dramatically upon completion of the post-period end deal to acquire the Fantech Group for AUD$280mn (£144mn).
The forward rating of 20 times consensus earnings suggests the market is up to speed, but we believe the tightening regulatory framework and housing market stimulus will eventually underpin growth opportunities.
BUY: Netcall (NET)
Netcall’s low-code platform is supposed to break down the barriers between software engineers and the rest of a company, writes Arthur Sants.
Its Liberty Create platform gives customers the ability to harness software solutions without needing a lot of coding experience.
The commercial argument for lots of software companies was that when interest rates went up and costs needed to be managed more stringently, businesses would increasingly look for software solutions. This hasn’t quite played out for everyone, but Netcall’s flexible platform has been in demand due to its flexibility.
In the year to June, revenue increased by 9 per cent to £39.1mn, driven by the cloud services revenue, which was up 19 per cent to £19.8mn. Meanwhile, total annual contract value rose by 15 per cent to £32mn.
In the year, adjusted cash profit (Ebitda) rose by 5 per cent to £8.4mn, which meant an Ebitda margin of 22 per cent. This was despite a 14 per cent increase in R&D spending to £5.7mn, which shows it continues to invest in the product.
This profit is also efficiently being turned into cash flow, which has helped fund the acquisition of three businesses, including an AI document processing business, Parble. Two businesses were acquired after the period for around £20mn, but with £34mn cash on the balance sheets this isn’t a problem.
There is not much to dislike about Netcall, so it is unsurprising it is trading on a forward price/earnings (PE) ratio of 23. But there aren’t many businesses with its profitability metrics and a free cash flow yield of 7 per cent.
