Company Updates - FSTA

Since my last update on Fuller's, the company has released its results for the year ending 30 Mar 2024, and provided a subsequent trading update for the 16 weeks to 20 Jul 2024 - coinciding with the company's AGM.

The AGM was well attended with a lot of good questions being asked, so I'll take you through some of those as well.

Here are the highlights from the above:

• Like for like sales for the Managed Pubs and Hotels business were 11% higher in FY24 than FY23. This exceeded the 6% growth in total sales from £306.8m to £325.3m, due primarily to the transfer of 23 sites from Managed to Tenanted during the year.
• Urban sites saw particularly strong like for like sales growth of 15.6%, as they continue to recover from the impact of the pandemic and train strikes.
• Sales of goods and services increased 6.1% from £271.6m to £288.1m. Included within this revenue category, food and drink sales experienced like for like growth of 14.5% and 9.8%, respectively. Their underlying volumes grew by 3.8% and 1.1%, with the rest coming from price rises.
• Accommodation revenue increased 5.3% to £35.5m, while like for like sales rose 7.8% and revenue per available room (RevPAR) grew from £89.47 to £97.26, driven predominantly by a 9% increase in average room rate to £119.84.
• In the Tenanted Inns business, revenue grew 13.4% from £29.8m to £33.8m, while operating profit grew 3.8% from £13.2m to £13.7m. The slight decline in margins was due to one-off costs associated with the aforementioned transfer of 23 sites from the Managed business.
• Management has disclosed that the 23 pubs transferred are already generating an incremental £1m in annualised profit.
• A question raised at the AGM asked for the criteria used to decide whether a property should be managed or tenanted? The answer was that it comes down to a site exceeding a minimum turnover threshold, determined mostly by staffing costs. This generally means that it's smaller, lower volume sites that get tenanted out.
• The transfers made in FY24 are expected to be the last of this magnitude for the foreseeable future.
• Adjusted EBITDA was £60.8m in FY24, up 17.4% from £51.8m in FY23. With net debt of £133.1m (excluding leases), this implies a current leverage level of 2.2x, leaving plenty of headroom against their target leverage of 3x net debt/EBITDA.
• The actual cash available for allocation in FY24 was £49.6m, of which £27.2m was used for capital expenditure, £10.0m for dividends, and £12.4m for share buybacks.
• Around half the capital expenditure will be for maintenance, so if we subtract this from the total we get a free cash flow figure of approximately £36m. Using a share count of 58.8m 40p share equivalents (there are three share classes) and a share price of £7.50, we can calculate the FCF yield as 8.2%.
• Combining the 6.63p per share interim dividend and proposed 11.12p per share final dividend, gives a total payout for FY24 of 17.75p per share - up 21% on FY23.
• The company's target dividend cover of 2.5-3.0x implies that management expects normalised adjusted EPS to be between 44.38p and 53.25p. This aligns with the FY25 LTIP threshold and maximum adjusted EPS targets for FY27 of 43.00p and 58.99p, respectively.
• Back in 2021, the company raised equity through a placing of 6.5m A shares at a price of £8.30 per share. In the time since, over 3m shares have been repurchased at an average discount of 30% to that issue price, and the repurchase programme has now been extended to 6.5m.
• There were a couple of major asset sales completed after the year-end, the first of which was The Mad Hatter in Southwark for a total consideration of £20m. What's quite incredible about this sale, is the fact the property was held at cost on the balance sheet with a value of £2m.
• The second asset sale was a portfolio of 37 "non-core" pubs to Admiral Taverns, for cash consideration of £18.3m. This represented a more modest premium to their carrying value of £16.7m.
• On 6 Aug 2024, the company announced a transaction in the other direction: it purchased Lovely Pubs, a collection of seven pubs in Warwickshire (six of which are freehold) for a total consideration of £22.5m. This purchase price represents a 7.3x EBITDA multiple, which is below the 10.5x average multiple applied when valuing the Managed freehold estate.
• Management expects the acquisition to be earnings enhancing in the first full year, and the multiple paid is pretty comparable to Fuller's current market value, making it an equally attractive allocation of capital versus a share buyback.
• Something that came across quite strongly from the AGM, is management's focus on enhancing the estate. Not only does this lead to greater cash flows, it also induces capital appreciation, which, due to the fact all properties are held on the balance sheet at cost, doesn't get reflected in earnings unless a property is subsequently sold.
• Management intends to invest over £30m in the estate in FY25, compared with £27m in FY24. This includes 26 transformational schemes, which should be earnings and valuation enhancing.
• In the first 16 weeks of FY25 ending 20 July 2024, the company has reported a further 5.3% like for like sales growth, and improving profit margins as inflationary pressures have eased.
• Following the repayment of £6m of debentures in Dec 2023 bearing an interest rate of 10.7%, the cost of debt across the remaining unsecured banking facilities and debentures is between 6-8%. These are predominantly floating rate, but the company has an interest rate cap and collar covering £60m which prevents the base rate from exceeding 5.00%.
• The interest expense arising from loans and debentures in FY24 was £11.1m, meaning the interest cover was 5.5x.
• Finally, the pension fund surplus increased from £14.6m to £17.3m in FY24. Management is now considering options around this, including a sale of the pension fund to a life insurer or similar entity.

Fuller's has performed pretty well since I first released a report on the company back in Mar 2023. Your mileage will of course vary depending on the timing of entry, but anyone purchasing shares in the Apr 2023 trough will have captured a total return (including dividends) in excess of 60% if held to today. I myself am up around 50% on my average purchase price.

From here there's still around 40% upside to get to the underlying net asset value, in addition to growth from earnings reinvestment, and direct distributions to shareholders.