It’s time to focus on Fuller’s

The pub sector has had a torrid two years, but this group is resilient and poised to prosper. We take a closer look at Fuller’s.

Over the past two years, the hospitality industry has been brought to its knees by one crisis after another, and many businesses in the sector are now on life support. Unfortunately, it does not look as if it’s going to get any better anytime soon. 

However, in times of crisis, there are always opportunities, especially for sector-leading operators with cash to spare. Fuller, Smith & Turner (LSE: FSTA) is one such company. 

Investing in pubs in restaurants

Pubs and restaurants are notoriously bad investments. The sector is highly competitive, fixed costs are high, profit margins are razor-thin and customers are fickle. That’s without throwing a pandemic and cost-of-living crisis into the mix. 

Considering all of these headwinds, it’s not surprising that more than 400 pubs closed down last year and, at current rates, a further 600 will cease trading this year. A total of 7,000 pubs have closed since 2012, a drop of 18%. 

But companies that are able to build scale and foster customers’ loyalty – and are financially strong too – have a huge advantage. They can not only out-earn their peers, but they can also snap up distressed peers in market downturns, taking advantage of a bad situation. 

Well-placed to prosper

Fuller’s has all of these characteristics. The company owns and operates 207 pubs directly in its managed business, and has a further 178 tenanted pubs, run by independent landlords. On top of this, it has over 1,000 hotel rooms and most of its property is owned, not leased or rented. 

At the end of March, the company’s property portfolio was valued at £593m on the balance sheet against £132m of net debt excluding lease liabilities. That’s the lowest ratio of debt to assets of all its listed peers bar Young & Co’s. 

This may even understate the company’s financial position. Its directors believe the property portfolio could be worth as much as £996m. 

A closer look at the balance sheet 

This asset-rich balance sheet gives the company two advantages. Firstly, it does not have to worry about meeting rental bills. Secondly, it gives the group an asset to borrow against if it needs short-term working capital, a lack of which is a leading killer of small businesses. 

For example, during the pandemic, Fuller’s utilised the Covid Corporate Financing Facility (CCFF) provided by the Bank of England. 

It has since replaced the CCFF money with a four-year £200m bank facility. This gives the company the firepower and balance-sheet stability to weather the current economic climate and consider growth opportunities when they emerge. 

Investing in Fuller’s - diversification and scale 

Just under half of the group’s locations are inside the M25, a strategic advantage in today’s market. The affluent areas of London and the southeast are more insulated against economic headwinds than the rest of the country. 

One of the company’s jewels outside the capital is its premium Cotswold Inns & Hotels brand. In hindsight, Fuller’s deal to buy the Cotswold hotels was incredibly well-timed. It paid £40m for the portfolio of seven hotels in 2019 just before the pandemic shut down global travel for almost two years and staycations became the norm. These locations provided a valuable source of income for the group in 2020 and 2021, and they will continue to provide lucrative diversification.

The group also owns other hotel brands, so this is far more than just a pub operator. Fuller’s size and diversification give the group impressive economies of scale. It has used this to its advantage over the past two years to deal with supply and staffing difficulties that have hit the wider sector. 

The urge to grow

The past two years have been dismal for the hospitality industry, but Fuller’s has not only pulled through, it has also emerged with a robust balance sheet and the urge to grow. 

At the end of July, Fuller’s announced that it had added one new site to the portfolio, at Heathrow Terminal 2. A further three were in the process of being acquired. The company was due to provide more information on these deals alongside its half-year figures, expected just after we went to press. 

Fuller’s plans to maintain its debt around current levels while investing between £20m and £30m a year in the estate. If past trends are anything to go by, that gives it room to snap up a handful of new pubs every year while investing substantial amounts in its existing portfolio. 

And considering the general state of the pub industry, now is a good time for a deep-pocketed buyer to be shopping for deals. 

A 2.5% dividend and an extra perk

Fuller’s is also aiming to pay a dividend equivalent to around a third of profits every year. Last year that was 11.3p per share. Projections suggest that could rise to 11.7p per share this year, giving a forecast yield of 2.5%. 

For those investors who enjoy a visit to the pub, Fuller’s shareholders who hold at least 1,000 A or C ordinary shares or 10,000 B ordinary shares can apply to receive a Shareholder Indulgence Card.

Cardholders get a 15% discount on food and drinks in any of the group’s managed pubs and hotels, and special rates on some of its rooms. Consider it a tax-free dividend you can collect every time you visit. Just don’t get too carried away. 

• Rupert Hargreaves owns shares in Fuller, Smith & Turner

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