Jamie Rollo at Morgan Stanley looks ahead to next month’s Q3 trading update from Mitchells & Butlers (M&B) (25 July) and says he expects lfl sales to have improved since the start of the quarter, given more normal weather and easier comparatives.
He said: “LfL sales for the first 33 weeks of the year were +0.4%, with a slight improvement in April (+1%) due to better weather and the shift of Easter. The weather has improved somewhat since then and comps get easier from here, given poor weather conditions and the Olympics in H2 last year (although the equivalent period was +1.6% for M&B last year, so not that weak).
“Taken together, we think LfLs will be around the +1% level for the rest of the quarter, in line with the first five weeks. EBIT margins rose 40bps in H1, a good performance given flattish LfLs and cost inflation, but this partly reflects lower pre-opening costs and the annualisation of last year’s cost savings, so we wouldn’t expect similar growth in H2.
“We will look for details on the actuarial pension review, taking place now, as we expect the deficit to rise sharply and affect the ability to pay a dividend.
“For the full year we expect sales of £1.9bn (+1%), EBIT of £310m (+2%), PBT of £182m (+10%), and EPS of 34.5p (+13%), leaving us slightly ahead of consensus at 33.3p. The shares trade on 10.6x cal 2013e P/E and 7.7x EV/EBITDA and, given that the current pension deficit is c.25% of market cap and 1x EBITDA, we think these are fair, if not full, valuations.
“The industry showed signs of improvement in May despite fairly tough comps and we expect similar trends at M&B. Taken together, we expect LfL sales for the nine-week IMS period to be +1% or even a little better.
“For the full year we expect a 16.2% operating margin, +13bps year on year. First-half margins rose 39bps as the period benefited from an incremental c.£4m of the £10m annualised cost savings, and lower preopening costs (expansion capex fell 75%), but the company said at the H1 results that it spent £4m more on labour and repairs improving levels of service and amenity. M&B remains committed to its 17.3-18.3% long-term margin target, although it has admitted that this has likely been pushed out a few years.
“At the interim results the company announced that it plans to only invest in its new categories of
Upmarket Social (All Bar One, Castle, Nicholson’s and Alex), Special (Miller & Carter, Vintage Inns, Village Pub & Kitchen, Premium Country Dining and Browns), and Family (Harvester and Toby Carvery) segments. The company said it is now more focused on returns rather than targeting specific numbers of new openings.
“This introspective work led to alower level of openings in H1, with 10 new sites, and M&B reduced its rollout plan from around 40 new pubs in the year to c.20. EBITDA returns on capex remained stable at 17%. The company said at the interims that it expects a lower level of expansionary capex this year of around £30m (vs. £55m last year), and to spend £50-80m per year in the medium term, in line with our forecasts. We will look for any further update here.
“The company’s triennial pension review began on 31 March and we will look for any further guidance on cash costs and how negotiations are going. We expect the deficit to increase significantly and do not see the company resuming a dividend until the issue is resolved. We now expect a dividend to be resumed in late 2014.”
