Young's biggest ever acquisition boosts revenue

Young & Co's Brewery's (YNGA) biggest acquisition to date has been greeted with scepticism by the market, with the shares down by 12 per cent since the purchase of Aim rival City Pub Group was announced in November. The £158mn deal completed in March and was at the heart of the annual results, delivering more than a third of total revenue growth and contributing to the slide in statutory pre-tax profits due to transaction costs. 

Integration is on track, with the deal adding 55 pubs and 240 bedrooms to Young's estate in high-end locations. The acquisition contributed £7.2mn of revenue and £1.7mn of cash profits in its four weeks in action during the financial year, and the material nature of the deal was highlighted in post-period trading as it drove managed house revenue up by a quarter over the past nine weeks compared to like-for-like growth of 2.4 per cent. 

Funding the acquisition meant that net debt shot up by around £194mn, to £360mn, with the net debt to adjusted cash profits ratio moving from 1.9 times to 3.9 times year on year. But as profits from the deal start flowing through, the leverage ratio should quickly come down again. This opens up the possibility of further acquisitions in the coming years. 

As well as purchase costs of £6.2mn for the City Pub Group acquisition, a negative property revaluation of £12.8mn and a £5.5mn impairment charge over goodwill and right-of-use assets pushed statutory profits lower. Adjusted operating profit climbed 9.4 per cent to £57.3mn, with the related margin up 50 basis points to 14.7 per cent despite cost inflation pressures. Adjusted pre-tax profit of £49.4mn, meanwhile, was a record for the business.

Elsewhere on the investment front, the company spent £48mn in the year on improving the existing estate. It picked up eight other pubs, including four from Marston's (MARS).

Like-for-like sales rose 3.4 per cent in the year, with food and drink sales up 1.5 per cent and 3.9 per cent respectively on a 52-week basis. As Investec analyst Roberta Ciaccia points out, like-for-like growth rates "show that management keeps pricing discipline". Organic sales are now more than 15 per cent ahead of pre-pandemic levels, and the combination of the pricing approach and a likely improved volume picture from what the company calls "a feast of summer sporting events" should aid trading in the near term.

The shares are valued at seven times enterprise value/Ebitda, a lowly rating amongst the freehold pub operators. We think long-term prospects remain strong and that the City Pub deal makes strategic sense. Buy. 

Last IC view: Buy, 1,097p, 16 Nov 2023