Leading analyst Jamie Rollo, of Morgan Stanley, says he expects new Mitchells & Butlers chief executive to update the market on the company’s mitigation of the pressures of the National Living Wage next month.
M&B will announce its full year results at the end of next month and Rollo said the focus will be on H2 margins and any changes implanted by Phil Urban to drive revenue growth as well as any sign of a strategic review.
Rollo is forecasting revenue of £2.1bn (+7%), EBIT of £328m (+5%) and EPS of 35.3p (+9%) versus consensus of £2.1bn, £329m and 34.8p, respectively. Looking ahead to FY16e, he forecast EBIT of £338m, assuming 1% like-for-like sales growth and 10bps margin growth.
Rollo said: “The company announced a weak trading update at its September pre-close statement. LfL sales fell 0.7% in the last seven weeks of the year, giving LfL sales growth of 1.0% for the first 50 weeks of FY15. Within Q4, food sales were -0.2% and drink -1.4%, and the company said the pub market was subdued in the summer, and exacerbated by the wet weather. We think October will be mixed, as data from Coffer Peach and the Greene King Leisure Spend Tracker suggest the Rugby World Cup negatively impacted food-led pubs, to which M&B is more exposed than wet-led pubs.”
On National Living Wage, Rolo said: “The Government’s target of over £9 by 2020 would be a 5.7% CAGR in the NLW over 2016-2020. Labour is c. 28% of M&B sales, most of which is at or close to the current NMW, and around half this is for over 25 year olds. Hence a 6% annual increase is a c. £15m annual headwind (2.5% to the wage bill excluding pay increases for under 25s). M&B has not been as
explicit as others on how it can mitigate this, but we hope it clarifies its plans, it does have a good track record of wage cost control (2005-15e labour ratio up from 26.1% to 27.9% despite its more labour-intensive food mix growing from 31% to 51% of sales. We assume a 3.0% annual wage cost increase in our forecasts, and 1-2% for other operating costs. With 1% LfL sales growth insufficient to offset cost inflation we now see 20-30bps annual EBIT margin decline, with the exception of FY16e (+10bps) which should benefit from the Orchid cost savings.”
