#7 - Marston’s - from debt to dividends

This is #7 in our "Twelve Stocks of Christmas 2025" Series.   You can review the full set here. 

The Pitch

Marston’s (LON:MARS) is now completely focused as a pub operator (1,300 pubs), having sold its brewing operations (Pedigree and Hobgoblin) to Carlsberg in 2024. On first glance, it seems another debt-laden, ex-growth, “cheap for a reason” stock. But a trading statement in October with “free cashflow significantly ahead of plan” has triggered a re-rating. Debt paydown is happenting at pace, store refurbishment returns are impressive, and shareholder returns may soon be on the cards. If so, and at a StockRank of 97, the shares may be significantly underpriced.

The Big Picture

Marston’s over-expanded when debt was cheap. Lenders happily lent because loans were asset backed - across both brewing and pubs. But COVID hit at peak leverage and cashflow disappeared. Since then management have shown operating discipline, selling the capital-heavy brewing business, and focusing on the higher return pub estate. It’s working.

• Debt is shrinking by design - the business has securitised its debt, which is on a payment schedule. This enforces management discipline, as they have to hit repayment targets.
• Cashflow has crossed a line - improving profitability (+71%) and margins (at 23%) have pushed free cashflow to £53m, well ahead of the £44m fixed debt payments.
• Value is shifting from debt to equity - this is key. As debt is paid down, the business should generate more and more free cashflow to equity. Marston’s last paid a dividend in 2019. If dividends are reinstated, as expected within 18 months, expect a new shareholder base to aggressively buy the shares. It seems some already are.

Going Deeper

Marston’s is now a far simpler operation having exited brewing. Revenue growth is not the primary goal, financial resilience is. Nonetheless, the business is showing skill at implementing their strategy and sweating assets.

• Refurbishment is working - management upgraded 31 pubs in the last year across three smart, localised concepts - “Grandstand” focused on big game sports events, “Woodies” which appeal to families, and “Two-Door” which target drinkers and diners. These upgrades drove 23% revenue increases at a 30% ROI at the venues.
• Disciplined rollout - 50+ refurbishments are planned in 2026, with capex at up to 7-8% of revenue. Importantly, this is funded from cashflow, not new borrowing.
• Doing digital right - Simple things work well - a new “order & pay" platform launched this year which increased spend per guest by 10%, while other wifi/till investments are working
• Small operator pain is Marston’s gain - business rates are increasing, people are drinking less and small operator pubs can’t keep up. Ironically, when demand is falling in an industry, the survivors can increase margins as sub-scale operators exit. Management expects margins to keep rising this year.

What the Brokers say

Marston’s is not widely covered, with only Panmure Liberum notes available on Research Tree. Nonetheless, their leisure sector analyst has Marston's as one of their top three picks for the year.

• Target price - 80p - 35% above the current 59p. This is backed by an NAV (net asset value) of 125 pence per share. The strong asset backing of the company's bricks and mortar estate puts the business on a price-to-book ratio of only 0.47x.
• Upgrades - the broker left their numbers unchanged in the latest update but reiterated their buy rating. I prefer to see upwards earnings revisions, but I'm comforted by the "significantly ahead" announcement the company made against their own internal expectations in October.

The Bear Case

Marston's no longer seems to be living on a quarter-to-quarter basis, but there are always risks, especially in the pub sector, so we can't look past these entirely.

• Execution matters - Management may have chosen the best sites for early refurbishment, and customer excitement may fall, so the early numbers may fade.
• Sector headwinds - Even the best-run pub groups are facing pressure from weaker consumer demand, especially amongst young people who aren't drinking as much.
• Cashflow has to hit plan - The business is still highly leveraged, and any wobble or miss of the repayment plan will slow debt reduction and create concerns for equity holders.

The Bottom Line

Throughout this year, we've been researching the power of "ahead of expectations" announcements, especially in value stocks. Could the October update have marked the bottom in Marston's and triggered the start of a new uptrend? The long-term share price chart looks like a bowl, and it’s second-highest ranked "value and momentum" share in the UK stock market. Marston’s is now a simple pub business generating real cash, paying down debt on schedule, and promises a future of potentially higher shareholder returns. There's not going to be a straight line here, but it is looking interesting for those with risk-appetite.