Leading analyst Douglas Jack at Numis says he expects Mitchells & Butlers’ AGM statement, which is due on 29 January, to be “reasonably upbeat”, given the signs that operational improvements are finally starting to be reflected in LFL sales, in addition to which, the company should be benefiting from the improving consumer backdrop.
Jack, who upgraded his forecast with an ‘Add’ recommendation and a target price of 480p, said: “25 new outlets are expected to open in 2015E. The main priority must be to improve EBITDA returns, particularly from 18% on leaseholds and 16% on conversions (freehold returns are 13%, on average), whilst continuing the conversion programme for the acquired Orchid estate. Despite rising capex, we forecast the company’s net debt/EBITDA to fall to 4.4x from 4.6x this year.”
LFL sales rose 2.4% during the first eight weeks following two years of sub-1% LFL sales growth.
Jack said: “LFL sales are being supported by reduced staff turnover (at 78% in 2014), higher net promoter scores (up 4 ppts to 63% in 2014), food and drink volume growth (both rose 1% in 2014), as well as increased levels of capex on rebranding and IT systems.
“EBIT margins fell 50bps last year and are forecast to fall slightly this year largely due to dilution from the Orchid acquisition (initial costs, including refurbishment downtime, without all the synergies). Much depends on LFL sales and pricing behaviour. Being January, food discounts are prevalent (including 20% off food at Toby and Harvester, as well as 2-for-1 at Embers Inns), but drinks prices are up 3.4% over the last 12 months (versus +2.9% over the previous 12 months) according to CGA.
“We are upgrading our forecasts by 4% (2015E PBT to £192m from £185m), largely by now assuming that LFL sales grow by 1.5%, rather than 1.0%, resulting in margins falling 10bps. This adjustment reflects how M&B remains operationally and financially geared into any recovery in LFL sales.
“M&B’s shares are fairly valued, in our view, but there is plenty of growth potential to drive the shares. We are forecasting 32% earnings growth over the next three years; consensus 41%. Any further recovery in LFL sales or reduction in the pension deficit would be an added bonus.”
