Company Updates - FSTA

On 13 Nov, Fuller's released its half-year results for the 26 weeks ending 28 Sep 2024, and they were on the whole decidedly positive, with solid growth in pretty well every metric.

It's only been a couple of months since I put out an update covering the FY24 annual report and AGM, which discussed a number of key events that occurred after the year-end. These included: the acquisition of Lovely Pubs; the sale of The Mad Hatter in Southwark for an astounding profit; and the sale of 37 non-core tenanted pubs to Admiral Taverns. I'll endeavour not to retread the same ground, but you'll see the impact of these events in the 1H25 results in various places.

Without further delay, here are the highlights for the half-year:

• Revenue rose 2.8% to £194.1m (1H24: £188.8m), with the managed pubs and hotels contributing £176.6m (1H24: £172.5m), and the tenanted inns £17.5m (1H24: £16.3m). Reflected in these figures is the transfer of 23 pubs from the managed to tenanted estate in the prior year, and the aforementioned sale of 37 tenanted pubs that occurred during 1H25. Excluding the impact of the former, managed revenue would have been up 6.0% instead of 2.4%.
• On a like-for-like basis, managed sales were up 5.2%, with growth across all revenue categories: food sales increased 5.5%, drink 4.9%, and accommodation 4.9%. Revenue per available room (RevPAR) increased 5% to £114.10 (1H24: £108.67), while the average room rate increased 7% to £138 (1H24: £129).
• Adjusted EBITDA for the managed estate rose 5.4% to £39.1m (1H24: £37.1m), while adjusted operating profit rose 9.1% to £27.7m (1H24: £25.4m). The tenanted estate saw adjusted EBITDA increase 9.6% to £9.1m (1H24: £8.3m), and adjusted operating profit increase 8.7% to £7.5m (1H24: £6.9m). The proactive portfolio management previously described, helped average EBITDA per tenanted pub grow 12% year-over-year.
• Adjusted EBITDA and operating profit margins for the managed estate both improved, rising from 21.5% and 14.7% in 1H24, to 22.1% and 15.7% in 1H25. The tenanted estate also saw margin growth, with the adjusted EBITDA and operating profit margins rising from 50.9% and 42.3% in 1H24, to 52.0% and 42.9% in 1H25.
• At the group level, adjusted EBITDA was up 8.0% at £37.6m (1H24: £34.8m), and adjusted operating profit rose 13.1% to £24.2m (1H24: £21.4m). The adjustments were primarily to exclude £6.4m of asset impairments recognised in 1H25 (1H24: £1.5m). On a statutory basis, operating profit came to £16.4m (1H24: £21.4m).
• Adjusted profit before tax rose 21.4% to £17.6m (1H24: £14.5m), and adjusted profit after tax rose 22.1% to £12.7m (1H24: £10.4m). In this case, the adjustments were unfavourable as they excluded the £18.8m profit on disposal of properties, which significantly outweighed the aforementioned impairments. The statutory figures were £29.0m (1H24: £14.9m) and £21.8m (1H24: £10.7m), respectively.
• Earnings growth was even greater on a per share basis due to the share count falling by 3.9%. Adjusted earnings per share grew by 27.1% to 21.81p (1H24: 17.16p), and statutory earnings per share grew 112% to 37.44p (1H24: 17.65p).
• Operating cash flows fell to £24.0m (1H24: £31.7m), predominantly due to timing differences that resulted in greater working capital outflows than the prior year. Subtracting £5.0m interest expense (1H24: £5.1m) and £5.0m maintenance capex (1H24: £4.5m), gives us a free cash flow figure of £14.0m (1H24: £22.1m).
• Asset sales generated £36.4m (1H24: £0.1m), exceeding the £31.1m spent on acquisitions and capex (1H24: £9.0m), to give a net cash inflow from investing activities of £5.3m (1H24: £8.9m outflow).
• Beyond investing in existing and new assets, the net cash inflows were also used to pay dividends of £6.5m (1H24: £6.1m), repay £6.3m of debt (1H24: £7.0m), and make share repurchases totalling £8.4m (1H24: £3.5m).
• As a result of the earnings growth, the Board has announced a 12% increase for the interim dividend to 7.41p (1H24: 6.63p). If the final dividend is maintained at 11.12p, the total dividend yield (with a share price of 682p) would be 2.7%, and given their dividend cover target range of 2.5-3.0x, this would put management's normalised earnings expectation at 46.33-55.59p per share, equating to an earnings yield of 6.8%.
• The carrying value of property, plant and equipment on the balance sheet has remained pretty well flat at £580.3m (1H24: £580.5m), as asset disposals and impairments were offset by additions.
• Net debt was similarly flat at £128.2m (1H24: £129.4m), while increased profits reduced the corresponding leverage ratio to 2.3x (1H24: 2.6x).
• Shareholder equity at the period end was £440.2m (1H24: £442.8m), meaning the shares currently trade at price to book ratio of 0.90x. We know however that this understates reality, as the assets are recorded at historical cost, which in many cases is below their current market value (e.g. The Mad Hatter - held at £2m and sold for £20m). Based on management's most recent estimate, the shares are likely trading somewhere around 0.5-0.6x realisable net asset value.
• Having invested £10m in the estate during H1, the company plans to spend a further £20m on capex in H2, with the split between maintenance and enhancement capex generally being 1:1.
• Finally, management has revealed the cost impact of the recent Budget, which included increases to both employers' National Insurance contributions and the minimum wage. They expect the former to cost £3m, and the latter £5m, for a total hit of £8m. This is too substantial for the company to just absorb, so they will look to increase prices and may reduce their planned investment for next year.
• Needless to say, this is unlikely to provide the growth the Chancellor is seeking. Unless said growth is in prices and unemployment.