Morgan Stanley leisure analyst Jamie Rollo looks at the divergent share performance of Greene King and Mitchells & Butlers (M&B) in the past year.
He said: “Like-for-like sales (Coffer Peach industry tracker) fell 1.4% in May, a deterioration from -0.8% in April and +0.6% in March. May’s figure was primarily caused by casual dining chains (-5.6%), with pubs +1%, and impacted by holiday timings. Still, the trend has been deteriorating all year, with now three consecutive months of less than 1% growth on a two-year basis, the worst period of trading for more than three years.
“The Restaurant Group (first quarter 2016 -1.5%) and Mitchells & Butlers (first half 2016 -1.6%) both reported declines in like-for-like sales, supply growth remains high (3.5-4.0% annual growth), and the industry faces challenges from shifting consumer behaviour, falling beer consumption, and competition from supermarkets and coffee shops.
“In this context, we note the sharp difference between the share price performance of Greene King and Mitchells & Butlers, the two largest managed pub operators.
“While we acknowledge Greene King’s obvious positive differences (stronger like-for-like performance, benefits of Spirit acquisition, higher dividend support, stable management), Mitchells & Butlers arguably has a more attractive business mix (all managed pubs), a higher freehold mix, and a much cheaper valuation (calculated 2016e price to earnings ratio of 7.2x versus 11.5x).
We expect solid FY16 results from Greene King later this month, but any recent like-for-like sales weakness, or any disruption from the required catch-up spend at Spirit, could have a disproportionate share price impact if it derates towards peer levels.”