Marston's PLC: London Stock Exchange-traded LON: MARS is a restaurants and bars group companies, which is engaged in running pubs and beer brewing. The company's operational segment comprises of Destination and Premium, which comprises of food and drink sales, accommodation and gaming machine income, another segment is Taverns, which comprises of food and drink sales, rent from licensed properties and gaming machine income and the third one is Brewing, which includes drink sales and a third party brewing, packaging and distribution and group activities. The group is a £703.78m market-capcompany, which ranks it among the mid-caps listed and traded on the London Stock Exchange and also a constituent of FTSE 250 index. As on May 23, 1947, stocks of MARS were admitted to the London Stock Exchange for trading.

Trading Update: (16-week to January 18, 2020, £m)
In trading update reported by the company as on January 24, 2020, the group reported that in its Pubs segment, the total managed and franchise (LFL) sales during the period under consideration increased 1.0%, benefited by continued growth in drinks sales but partially offset by a lower food sales in the same period. However, trading over the festive season was solid with LFL sales growth of 4.5% against year-over period and compensated for more muted demand in the first three weeks of December 2019 because of poor weather consequences.

However, its beer’s volume was slightly behind the year-over performance on account of weaker performance in softened performance in the Off-Trade in December, primarily due to weaker sales. However, despite the volume decline, earnings were in line with the group's expectations.

Costs were broadly in line with the guidance provided in the preliminary results in November 2019; however, the recently announced a 6.2% surge in the National Minimum Wage from April is relatively higher than expected, and that will lead to a £2-3m surge in the second half year’s costs.

Financial Highlights (2016-2019)

Source: Data for the period 2016 to 2019 have been taken from Thomson Reuters

Over the past three years, the company's revenue has grown with a compounded average growth rate of 9%; however, the growth recorded in FY19 was considerably lower against the year-over period. Also, the company's Operating Profit before Non-Recurring Income/Expense declined with a CAGR of 5% in the past three years, led by increased operating costs. Margins also slumped in 2019, with gross margin slumped by 100bps to 55.54% and EBITDA margin plunged by 14% to 16.56% against 19.23% recorded in the year-over period.

The group has consecutively reported negative free operating cash flow over the past three years, which reflects that the company has more outgoings than incomings. Also, return on Equity turned negative in FY19 against 4.7% of ROE reported in the previous financial year.
 
Stock Performance

Daily price chart (as on January 27, 2020, before the market close). Source: Thomson Reuters.

Shares of MARS plummeted approximately 8% in the past three months, slumped approximately 14% in a month-over period, and declined approximately 8.5% in the past five trading sessions. However, on a YoY basis, its shares have delivered a price return of 17.5% respectively.

At the time of writing (at 02:40 PM GMT), shares of MARS traded 2.0 points or 1.8% lower at GBX 109.0. In the year-over period, its shares have delivered a 52w high of GBX 133.80 (as on November 28, 2019) and a 52w low of GBX 92.46 (as on February 15, 2019). At the current price level, its shares traded approximately 22% off from those high and around 18% above its 52w low price level, respectively.

Conclusion
Stocks of MARS tumbled more than approximately 8% post the restaurant and bar operator reported its trading update for the 16-week to January 18, 2020. As the group warned that a surge of 6.2% wage hike under the national minimum wage, which is applicable from April 01, 2020, would weigh pressure on its costs in the second half of FY20. However, the group posted steady Like-for-like sales growth for the period under consideration, and also during the festive season it reported an upbeat sales growth of 4.5% (LFL).

The overall story looks moderate as the group is planning to deleverage company by £200m in the next three years to be on track. It also noted that accelerated disposal programme would help the company to reduce its net debt, as in on year-to-date basis, the group has completed or exchanged on £60m of disposals against initial target of £40m and then increased its target to £70m in November 2019 and now increased its to between £85m-90m, respectively. Also, aiming to generate an annual net cash flow of £50m post dividend payout by 2023.

From the technical standpoint, its shares were traded considerably below its crucial short-term as well as long-term support levels of 50-day, 100-day and 200-day simple moving average price level, which reflects an unfavourable price trend in the stock.

Therefore, based on the above rationale, we have given a “Watch” recommendation at the closing price of GBX 111.0 (as on January 24, 2020), while we look for the growth catalysts in the near-term.

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