Fuller, Smith & Turner – Re-opening its estate must be a big relief

Fuller, Smith & Turner has withstood the test of time, and Covid represents a great opportunity to buy into that great heritage on the cheap, writes Mark Watson-Mitchell. 

With hundreds of years of history behind it, this group must have had a heart-wrenching period when it sold off its basic business – that of operating one of London’s most famous breweries.

For eons of time the Fullers Brewery site has dominated the geography of Chiswick. It still does, but not under the control of the former family business. Now that landmark has been sold off in April last year, in a £250m deal to Japan’s Asahi Brewery.

That has left Fuller Smith & Turner (LON:FSTA) now able to concentrate upon what is left within its estate – namely a collection of premium pubs and hotels.

There are 215 managed pubs and hotels, boasting 1,028 boutique bedrooms, and also 177 tenanted inns.

With some 56% outside of the M25, now stretching from Brighton to Birmingham and from Bristol to the Greenwich Peninsula, in city and countryside locations, the Fuller estate is an impressive package.

An important part of the company’s strategy is that, within the whole of its estate, it focusses upon delicious fresh, home-cooked food, outstanding cask and craft ale, great wine and exceptional service.

As CEO Simon Emeny stated with the group’s finals a couple of weeks ago, “this is a transitional year for the company following the sale of the brewing business and subsequent separation of a highly integrated business.”

You can say that again Simon – wow, I would not have wanted to be in your shoes when Covid-19 impacted the hospitality sector. Almost total closure and no income stream must have been very painful indeed.

But as we all know – such calamities do not last forever and such tribulations become the proof of good and able management. And with hundreds of years of experience behind Fullers that must have helped the gritting of teeth, awaiting the gradual ending of the lockdown and the phased reopening of its pubs and hotels.

Obviously, while its estate was effectively closed it was painful, it has been burning cash, some £5m a month since March.

The group, having received the proceeds from the sale to Asahi Europe, was left in a strong position with substantial liquidity headroom just when the pandemic hit the country.

Broker estimates suggest that revenue will drop £110m this current year to end-March 2021, with a £13.25m pre-tax loss.

However, with no second lockdown, revenues could bounce right back up to £331m next year, giving pre-tax profits of £29m, worth 42p in earnings and covering a 16.5p dividend per share.

There are 33.64m ‘A’ shares in issue, of which BlackRock Investment Management is the biggest holder (13.6%). Other large investors include Threadneedle Asset (5.88%), Aberdeen Asset (4.33%), Lindsell Train (3.70%), Highclere International (3.14%), Dunarden (3.03%), Kames Capital (2.89%), and Royal London Asset (2.09%).

Both Liberum Capital and Peel Hunt have price objectives of 700p for the shares, which were over 1,200p this time last year.

Peel’s analyst Douglas Jack has upgraded his view to a ‘buy’ and reckons that the true net asset value is above 1,000p.

The group’s shares, up from 520p a couple of weeks ago ahead of the 2019/20 results, are currently trading around the 600p level. At that price they don’t look cheap. However, taking an eighteen-month recovery view gives them more attraction.

The estate has now been operating for the last month or so. When the group holds its AGM next month, we should get a more up to date picture on just how the re-opening process has fared.

Ahead of the forthcoming AGM, and after the recent pick-up in price, there may well be a cheaper opportunity to pick up some stock.

My target price is 700p.