Broker snap: Take up Marston's rights, Charles Stanley advises

10th Jul 2009 13:14

The right issue announced last month by brewer and pubs owner Marston's has left a sour taste in the mouths of many shareholders but Charles Stanley advises taking up the rights to avoid dilution.The Independent on Sunday reported at the end of June that a number of institutional investors had criticised the cash call, which will largely be used to finance expansion rather than reduce the company's £1.2bn debt pile.Charles Stanley is an advocate of the company's strategy, however. "We believe that the long term interests of the business would be best served by directing the highest proportion possible of the proceeds towards the new build project thereby ensuring longevity of earnings generation rather than short term debt repayment," Charles Stanley analyst James Dawson said in a research note released on Friday."Having suspended the new build programme to conserve capex [capital expenditure] at the end of 2008, management intends to take advantage of the present fortuitous development costs," Dawson said, adding that new build pubs generally generate better returns than refitting existing pubs. "The group's decision to restart its new build programme appears entirely logical and reinforced by the withdrawal of its major competitors," Dawson believes. The broker has retained its "buy" recommendation but trimmed its price target to 115p from 132p "to reflect the time delay before the proceeds generate returns."