Leading analyst Karl Burns at Panmure Gordon has argued that the fundamental issue with Mitchells & Butlers (M&B) is that it is now seen more as a restaurant company rather than a pub company and is coming into direct contract with the growth in casual dining operators, resulting in increased competition and market share shift.

He said: “Furthermore, we believe the balance between food and wet sales is broken down, with M&B sites losing the pub aspect and as a result, drink sales are declining as food sales rise. Compounding this issue is a negative gross margin trade-off, with food gross margins typically c.40% versus c.70% for wet sales. In addition, with 16 brands, we believe M&B needs to narrow its focus in order to compete in a shortening capex refresh cycle.

“Further to this, c.50% of M&B’s pub restaurants are arguably in the value space which is struggling against competition increasing service levels and the food quality threshold.”

Burns said that over the last three months M&B has been the worst performing Pub & Restaurant stock, declining c.23% in absolute terms and has underperformed the All Share by c.13%.

He said: “Despite the significant fall in the company’s share price, we feel there remains downside risk due to increasing competition from casual dining chains and we remain cautious on the outlook. Both trading updates from Whitbread and Greene King highlighted a tough trading environment for pub restaurants, whilst wet-led pubs are outperforming.

“Therefore, we downgrade our 2016, 2017 and 2018 forecasts by 4%, 5% and 7% respectively and now sit 2%, 3% and 4% below consensus estimates. We reduce our target price to 331p (from 377p) due to a more cautious outlook and retain our Sell recommendation.”

Burns said that compounding potentially slower sales growth is accelerating wage inflation from April 2016.

He said: “We believe M&B could see around £15m of additional cost headwinds, equating to around 6% per annum. Whilst the company is likely to offset some of this via efficiencies, we believe it will be difficult for M&B not to see a negative impact.”