Leading analyst Anna Barnfather at Panmure Gordon has said that Mitchells & Butlers (M&B) remains a recovery story that is yet to deliver with rising industry competition and accelerating wage inflation pushing a recovery yet further into the future.
She said: “In particular, its largest pub restaurant brand (Harvester) has struggled in the face of new competition and weighed on group LFL sales. While plans to convert outlets to premium brands makes sense, the additional capex required will act as a drag on returns as add further cash flow constraints.
“After yet more management turmoil, the new(ish) CEO seems to have identified the issues and set to work on halting the LFL declines and defending margins through accelerating investment cycles to smooth capex, and step up the rate of site conversions (250 this year and 300-350pa thereafter).
“While recent conversions - away from mid-price family dining brands such as Harvester and Toby into more premium offers such as Miller & Carter or, Pizza & Carvery – show sales growth of >10%, overall sales are still in decline with 3Q LFLs running at -1.3% (small improvement from -1.6% in 1H)
“M&B is purely a managed operator with a large annual wage bill running at around £600m per annum, equivalent to 28.3% revenues. Hence is particularly exposed to wage inflation and has given explicit guidance to that affect with additional £14m costs built into our forecasts for this year. With an operating margin of 15.6% and high percentage of food sales in the value-family space, it is also exposure to any potential food cost inflation with limited pricing power to pass it on.
“On first pass, the current valuation (2017E PE of 7.1x and 7.5 EV/EBITDA) may look undemanding however factor in the widening pension deficit, restrictive debt structure and esoteric shareholder structure and we view it as full. Our target price of 280p is based on DCF.”