Mitchells & Butlers shares are due a “pause for breath” believes analyst Berenberg.

In a note to investors it remarked that since it had upgraded Mitchells & Butlers (M&B) to a ‘buy’ rating in June, shares had risen by approximately 70%, supported by a combination of improving operational performance and the positive read across created for the wider pub sector by the recent acquisition deals for Greene King and Ei Group.

“While we think that performance is well warranted, it has been driven almost entirely through multiple re-rating, with only modest earnings upgrades,” it said. “As a result, we think the shares are at least due a pause for breath so, while we increase our price target to 480p, we downgrade our rating to hold.”

M&B has consistently improved its like-for-like sales over the past three years, from 0% to almost 5%, it noted, with growth being driven by improvements under management’s Ignite programme.

“We think M&B can continue to outperform the wider market, driven by the initiatives within its latest improvement programme, Ignite 3, although we also believe it is unlikely that lfl sales growth will reach the levels achieved by JD Wetherspoon (consistently over 5%),” it said, forecasting 2.5% lfl sales growth in FY20.

Berenberg said it expected margins to continue to decline modestly, with management anticipating a further £60m or so of gross cost inflation in FY20, offset by a similar level of mitigation.

It thinks the main upside risk remains M&B’s balance sheet and free cash flow. “We expect it to generate c£90m of FCF in FY20 and that should grow at c15% per annum in the coming years, before a further c£50m windfall once contributions to close the company’s pension deficit cease (likely around 2023).

“However, a hearing is due mid-next year on a dispute between M&B and the trustees of its pension fund – the crux of which is, if M&B wins, its actuarial deficit would fall by c£160m (from £293m),” read the note.

It said the likelihood of M&B winning was unclear, as is whether the current schedule of contributions would be amended in such a scenario – but M&B management is hopeful that, if it is successful, the trustees may consider reducing the term of magnitude of current payments.