Marston's (MARS)

[simoan]

You may well be right and when the CV dust settles a bid will come along.

It doesn't matter if I'm right, that would just be a cherry on the top and would not be a good reason in itself to continue holding.

But re the point about the pubs being less profitable ones, that should already have been baked into a reduced book value.
The pubs are regularly reviewed by specialist valuers and ones with trading problems written down. These had clearly not been written down nearly enough

Best of luck!

As I said, it's about safety of margin rather than absolutes. There's no way anyone can presently value anything precisely given such great uncertainties about the near term future. In that regard, Marstons is no worse than most other investments, although my own personal preference is normally to invest in asset light, high margin businesses, everything has its price.

All the best, Si

[johnhemming]

I think the difficulty for any bidder is that the NAV is almost certainly overstated before the virus came on the scene and although the liquidity injection from the government may stop capital values crashing it is not something with a low level of risk and one cannot assume the values of the pubs will go up.

It strikes me as a highly geared speculative investment. I was nervous because they appeared to be using financial engineering in a way that was not entirely clear and selling pubs at a discount to book value. (probably under pressure from debtors).

Comparing it, for example, to Tullow. Tullow have a potential upside if oil prices go back up. I am not sure that Marstons have that.

[dealtn]

. I was nervous because they appeared to be using financial engineering in a way that was not entirely clear and selling pubs at a discount to book value.

?

Correct accounting reporting of interest rate derivatives, or something else?

[johnhemming]

I presume they were mark to market which is fair enough, but there has to be some cash involvement somewhere.

[dealtn]

I presume they were mark to market which is fair enough, but there has to be some cash involvement somewhere.

An interest rate derivative, alongside a floating rate loan, will produce the same cash flows as a fixed rate loan (although the former combination will usually result in a lower effective interest rate).

in addition it is possible there will be some collateralisation of the mark-to-market of the interest rate swap valuation (that doesn't typically happen for fixed rate loans) but it will depend on the contract. Earlier ones might not have any collateralisation clause, and ones that do might only require posting security (not necessarily cash). I don't know what any contracts here will be like.

I'm not sure which of the above is causing you difficulty to explain my thinking further.

[johnhemming]

I understand the principle. The issue is that I like to think I understand the cash flows (and accrual accounting) for a business and if I feel I don't then I am less inclined to invest.

My style of investment tends to be heavily into stock picking and that can only really work where I can come to judgments about a stock at least where I have confidence in that I understand what is going on.

In the end I spend quite a bit of time researching stocks, but most of my commercial activity is in developing a business I have started (and particularly writing software for that business). Hence if it starts getting a bit complicated I am more inclined to move onto something else.

[dealtn]

I understand the principle. The issue is that I like to think I understand the cash flows (and accrual accounting) for a business and if I feel I don't then I am less inclined to invest.

My style of investment tends to be heavily into stock picking and that can only really work where I can come to judgments about a stock at least where I have confidence in that I understand what is going on.

In the end I spend quite a bit of time researching stocks, but most of my commercial activity is in developing a business I have started (and particularly writing software for that business). Hence if it starts getting a bit complicated I am more inclined to move onto something else.

Unfortunately businesses can't choose what accounting methods is used. Not many will have liberty to choose "accrual accounting" for interest rate derivatives, although some end up with this method.

[johnhemming]

They do, however, have presentational discretion. I think I was unhappy about this RNS
https://www.investegate.co.uk/marston-- ... 00027586U/

Which has underlying profit of 101m, but statutory loss of 20m (much of which was swaps).

Looking at the cash flow statement there was a line:
Non-underlying operating items (72.2)

I know what sort of games are played from time to time in some other companies moving things from "underlying" to statutory. There are of course GAAP or FRS requirements, but within that there is quite a bit of discretion.

Hence where statutory varies substantially from "underlying" I start losing confidence.

[dealtn]

They do, however, have presentational discretion. I think I was unhappy about this RNS
https://www.investegate.co.uk/marston-- ... 00027586U/

Which has underlying profit of 101m, but statutory loss of 20m (much of which was swaps).

Looking at the cash flow statement there was a line:
Non-underlying operating items (72.2)

I know what sort of games are played from time to time in some other companies moving things from "underlying" to statutory. There are of course GAAP or FRS requirements, but within that there is quite a bit of discretion.

Hence where statutory varies substantially from "underlying" I start losing confidence.

How would you want it reported if the "swaps" contributed a non-cash profit of £121m, and is that view consistent with a £121m loss?

I tend to ignore the headline profit numbers anyway until I know what makes them up to what they represent. I might be in the minority and broadly agree that there is a lot of room for "interpretation".

[johnhemming]

The point, however, is that it would take me a while to go through the accounts and look at how it all works out and it makes me uncomfortable with lots of exceptionals. I don't mind exceptional income because of the conflict of interest on the reporting process. It is easier to trust someone saying this income is a one-off compared to someone saying the expenditure is a one off.

[dealtn]

The point, however, is that it would take me a while to go through the accounts and look at how it all works out and it makes me uncomfortable with lots of exceptionals. I don't mind exceptional income because of the conflict of interest on the reporting process. It is easier to trust someone saying this income is a one-off compared to someone saying the expenditure is a one off.

Well we agree there, it takes time, and that in itself is an issue. I doubt many accounts are as easy to read as they used to be. Probably over all that's for the better. It does make me suspicious sometimes of ones that are too easy to read too!

I think it will be genuinely interesting to what happens if/when interest rates rise sufficiently such that exceptional profits start being made on these kind of derivatives. It wouldn't surprise me if new accounting standards are brought in so accounts aren't "flattered". Hence my question on how you feel about the potential asymmetry.

[johnhemming]

Hence my question on how you feel about the potential asymmetry.

Obviously it should not be asymmetric, but given that directors bonuses are often linked to the "underlying" figures reasons are often found for asymmetric reporting.

[Wasron]

I’ve been mulling over this news for a day now.

There might be a bid, there might not.

The JV dividends are unlikely to reach us as shareholders. The cash burn in 2020 has undoubtedly made Marstons weaker.

I bought Marstons for the dividend six years ago and could be waiting another six for them to resume (if no bid materialises).

At the moment I’m most likely to sell on Tuesday and put the cash into ITs, as I still can’t see pubs and restaurants being anything near profitable in the next 12-18 months.

Wasron

[idpickering]

INTERIM RESULTS FOR THE 26 WEEKS ENDED 28 MARCH 2020

https://www.investegate.co.uk/marston-- ... 00041436R/

Also posted on HYP Practical Board.

[Wizard]

An interesting snipet from the Martston's interim results...

The deficit on our final salary scheme was £3.9 million at 28 March 2020 which compares to the £36.4 million deficit at last year end.  The decrease in the deficit is due principally to a significant decrease in the liability, driven by an increase in the discount rate and reduced expectations for future inflation.

Presumably others with deficits will also benefit.

[dealtn]

An interesting snipet from the Martston's interim results...

The deficit on our final salary scheme was £3.9 million at 28 March 2020 which compares to the £36.4 million deficit at last year end.  The decrease in the deficit is due principally to a significant decrease in the liability, driven by an increase in the discount rate and reduced expectations for future inflation.

Presumably others with deficits will also benefit.

And those without!

You would need to dig down further to do proper analysis though. I commented elsewhere on such a recent occurrence at Wincanton. There will be plenty of others too, but in particular companies that are having their Triennial valuation around this time might in addition to the valuation change, find the ongoing payments required to "eliminate" this problem adjust favourably too. A cash flow benefit for share holders, potentially improving Dividends (for whom that matters).

[tjh290633]

The CMA has approved the deal with Carlsberg.

TJH

[SDN123]

The CMA has approved the deal with Carlsberg.

TJH

I’m sorry if this is a dumb question, but if the “now approved” joint venture with Carlesburg goes through will Marston remain a quoted company on LSE or will my shares be transferred into a “NewCo”? If it’s a new company will it be based on London or Denmark?

[tjh290633]

The CMA has approved the deal with Carlsberg.

TJH

I’m sorry if this is a dumb question, but if the “now approved” joint venture with Carlesburg goes through will Marston remain a quoted company on LSE or will my shares be transferred into a “NewCo”? If it’s a new company will it be based on London or Denmark?

My understanding is that there will be a joint venture company incorporating both company's brewing operations. Marston's will own a percentage of the JV and will still have it's estate of licensed properties.

Have a look at RNS posts under Marston's name, which should give further details.

https://www.investegate.co.uk/marston-- ... 35547901N/

TJH

[SDN123]

The CMA has approved the deal with Carlsberg.

TJH

I’m sorry if this is a dumb question, but if the “now approved” joint venture with Carlesburg goes through will Marston remain a quoted company on LSE or will my shares be transferred into a “NewCo”? If it’s a new company will it be based on London or Denmark?

My understanding is that there will be a joint venture company incorporating both company's brewing operations. Marston's will own a percentage of the JV and will still have it's estate of licensed properties.

Have a look at RNS posts under Marston's name, which should give further details.

https://www.investegate.co.uk/marston-- ... 35547901N/

TJH

Thanks that does help.

In short and third company will be created (UK based), Marston will become a pub landlord, the new company will be a brewer 40% owned by MARS. Dividends will flow from new company to MARS who may or may not pass those on to this shareholders (which includes me). I think that’s right.