Smith & Williamson’s Mark Swain has warned pub groups may need to cut dividends and use the cash to compete against ‘nimble’ restaurant brands.
Swain, manager of the £146 million Smith & Williamson Enterprise
fund, took out a ‘short’ position on a pub company in January, but did not disclose which one.
He said pub groups may be forced to take ‘drastic measures’ to stop popular ‘casual dining brands’ eating into their market share.
As the number of people visiting pubs falls, chains will need to fight off ‘nimble and adaptable’ restaurant brands, he argued.
‘Many of the sector’s stalwarts are too large and unwieldy, with large debt piles and a lack of ability to invest, leaving them with some stark choices – including potential dividend cuts,’ said Swain.
Swain said that some pub groups had ‘stretched debt levels – as high as four times earnings’.
‘When you look at their balance sheets, they have high levels of debt and are trading poorly,’ he said. ‘The option for these firms is to either invest with money they don’t have or cut the dividend and risk hitting the stock price.’
One of the main problems is the lack of flexibility in the business model, with management teams rolling out the same strategy across every pub rather than adapting each venue to suit its location.
‘Some large pub groups are running a tired and dated business model, and a business model that is underinvested in.’
While Smith & Williamson does not disclose the individual stocks it is shorting, or betting against, the fund’s largest short position is in the consumer discretionary sector, representing 18.7% of assets, although it also has a 12.5% ‘long’ position in consumer discretionary stocks.
The fund’s small size means it is not forced to make its individual short positions public. Financial Conduct Authority (FCA) rules require fund managers to publicly report short positions representing 0.5% more of a companies’ shares.
FCA short selling data shows Greene King (GNK
) to be the most shorted stock in the pub sector, with fund managers betting against around 9.2% of its shares. The brewer and pub group’s shares are down 26% over the last year.
) is another target for bears, with 3.3% of its shares being shorted, and its shares down 20% over the last year.
Swain meanwhile does see promise in some stocks from the sector, and has a ‘long’ position in Ei Group (EIGE
) formerly Enterprise Inns.
Despite the size of the group, Swain said it was more flexible as it allowed tenants to control their own venues meaning ‘sites can take advantage of different trends that can make an impact on profitability at both a site and group level’.
‘Pubs that are in a restaurant group but managed individually are more able to make decisions that help the wider business,’ said Swain.
‘The exponential rise in popularity of craft beers is the perfect example of one of these opportunities.’
The Smith & Williamson Enterprise fund has delivered 36% over five years, placing it mid-table in Citywire’s Long/Short Equity sector.