Mitchells & Butlers — Update 29 November 2015

Mitchells & Butlers — Update 29 November 2015

Mitchells & Butlers

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Mitchells & Butlers

Prelims – dividend not lightly restored

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30 November 2015

Price

323p

Market cap

£1.3bn

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Share details

Code

MAB

Listing

LSE

Shares in issue

413.1m

Business description

Mitchells & Butlers is the largest operator of managed restaurants and pubs in the UK with 1,834 outlets. It operates well-known brands, including All Bar One, Harvester, Toby Carvery, Browns, Vintage Inns and Sizzling Pubs.

Bull

Dividend resumption increases potential investment appeal.

Orchid gives some visibility for growth.

New focus on profitability at site level.

Bear

Currently losing market share to competitors.

Untested new management.

Significant pension liability.

Analysts

Paul Hickman

+44 (0)20 3077 2501

Richard Finch

+44 (0)20 3077 5700

Mitchells & Butlers (M&B) has not paid a dividend since 2008, and its resumption has been extensively discussed, planned and considered for sustainability. Arguably the bellwether of the UK pub industry, its return to the dividend list now broadens its potential investment appeal. This is the opportunity for investors who believe M&B is capable of closing the 30% valuation gap to peers, although no one should expect that to be quick.

Dividend restored…

The final dividend of 5p, equivalent to a full year 7.5p, represents a yield of 2.3%. Its resumption has been carefully considered in terms of borrowings (£1.9bn against property of £4.2bn), free cash flow for investment and the demands of the pension scheme (balance sheet liability £304m, deficit contribution in 2015 £86m).

…at a trading low point

The results, although positive at earnings level, belie the increasingly sluggish nature of national discretionary spend, as well as M&B’s uncompetitive profile. Adjusted operating profit of £328m was up 4.8% and EPS increased 9.5%, driven by flat interest and a slightly lower tax rate. However, like-for-like sales growth, up 0.8%, has reduced from +1.4% in H1 to flat in H2, and in the current eight weeks has slumped to -1.6%. That signals smaller and more agile competitors taking market share. Operating margin, down 0.3 percentage points to15.6%, was however improved (by 0.3 points) in the second half as the company worked through inefficiencies following the acquisition of Orchid (173 sites) in June 2014.

The action plan now

Under incoming CEO Phil Urban, Mitchells is focused on (1) building a more balanced business – including upscaling some of the company’s smaller yet more successful brands such as Miller & Carter; (2) instilling a more commercial culture, with an emphasis on profitability; and (3) increasing the pace of execution and innovation. Part of the upside should be driven by conversion of Orchid sites to its own brands – the 41 conversions to date (of 96 planned) are achieving 30% ROI.

Valuation: 30% discount to peers

On a FY16e consensus P/E of 8.6x, the shares are trading at around a 30% discount to comparators Greene King (date-adjusted) and Marston's. This is the opportunity for investors who believe the company is capable of closing the gap, although no one should expect that to be quick.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

1,970

172

32.4

-

10.0

N/A

09/15

2,101

184

35.5

5.0

9.1

1.5

09/16e

2,181

197

37.6

7.7

8.6

2.4

09/17e

2,255

209

40.2

8.8

8.0

2.7

Source: Bloomberg

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Marston’s — Update 27 November 2015

Marston’s

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