On the back of its recent analyst day, which revealed a more confident management team, leading analyst Simon French believes that Mitchells & Butlers (M&B) is positioned to regain market leadership over the medium-term.
He said: “M&B has 40% of its assets operating in higher average spend segments of the market which will benefit from customers trading up whilst volume erosion has seemingly ceased in its value brands. Furthermore there is highly visible upside from synergy delivery from the integration of the acquired Orchid pubs.
“In our view the stock is inexpensive trading on a CY 2016E adj EV/EBITDAR of 7.4x and a P/E of 10.0x. We expect the group to shortly return to the dividend list which may pave the way for improved liquidity. M&B is our top pick in the sector, Buy.
“We expect the group’s LFL sales momentum to accelerate over the medium term as it benefits from relatively easy comparatives and strongly defined brand propositions whilst benefiting from customers seeking to trade up to higher price point formats. The Orchid integration is gathering pace with 65 investments remaining and c80 pubs to move to its Heartland division around September/ October. Our forecasts assume the group declares a final dividend at its FY results in November.
“Our FY 2015-16 forecasts are broadly unchanged following the H1 results and we continue to assume the group can improve LFL sales and margins during H2 of this FY, benefitting from synergy delivery. We now assume 3.0% LFL sales growth in FY 2017E leading to a c4% upgrade to EPS. The stock trades on a CY 2016E adj EV/EBITDAR of 7.4x and a P/E of 10.0x (stripping out the pension charge from the EPS calculation). Our forecasts also imply a yield of 2.9% in FY 2017E, the first full-year of dividend payments.”
