Jamie Rollo at Morgan Stanley looks ahead to the half year results from Mitchells & Butlers (M&B), which are due next month (23 May). He thinks tough trading will have continued for the company, but H1 margins should be flat given its cost savings programme. He said: “The focus will be on the pension review which we think is likely to delay the resumption of a dividend.”
“Mitchells & Butlers will report H1 results on 23 May. We expect revenues of £1,009m (+4%), EBIT of £144m (+4%), PBT of £76m (+12%) and EPS of 13.8p (+11%). H1 will be boosted by the shift in Easter, which fell in H2 last year and is an estimated £1-2m to EBIT, and from residual cost savings of c.£4m following the programme in H2 2012.
“The company has guided to flat margins in H1 as a result, despite the weak LfLs. H2 faces easier revenue comps from the poor weather and one-off events that dampened trading in H2 2012, however 2012 had a 53rd week, so we expect a 2% EBIT drop.”
Rollo said that for the full year, he forecasts EBIT of £307m (+1%) and EPS of 33.0p (+9%), in line with consensus at £308m and 33.1p.
He said: “M&B has arguably the highest quality UK pub estate, however its LfL sales performance has been disappointing relative to peers, its pension review which started in March will likely postpone a resumption of the dividend, and we see limited scope for positive forecast surprises, so remain Equal-weight. Trading. Like for like sales fell 0.3% in the 17 weeks to the January IMS, below our FY estimate of +1%.
“We estimate +1% for the remainder of H1 (February and March) which may be somewhat generous given the Coffer Peach Pub Sales Tracker showed flattish LfLs in the period (February +3.3%, March -3.0%) and March faced tough comps from unseasonably warm weather in 2012. Spirit Managed reported -4.1% LfL sales in the four weeks to 30 March. H1 should have seen a boost from the Easter shift and we will look for signs of strong trading over the period (Coffer Peach +7.0%).
“Like-for-like food growth in the first 17 weeks was 0.5% while drink saw a 1.3% decline. Food continues to be the driver of growth and we expect this trend to remain in the medium-term as consumers continue to spend money on low ticket treats. Comps get easier from April onwards due to poor weather last year, and we will look to the current trading statement for signs of improvement. Looking into H2, we currently forecast 2% LfL growth, which seems initially reasonable given weak comps from the poor summer and Olympics effect.”
Rollo pointed out that EBIT margins for 2012 were 16.1%, down 30bps from the previous year, although this did improve in H2 (-5bps) relative to H1, reflecting the cost savings.
He said: “At the IMS, M&B said operating margins were in line with last year and, with an incremental c. £4m of the £10m residual cost savings due in the first half, we forecast flat margins for H1 at 14.2%. Looking into the rest of the year, we expect H2 margins to be down 30bps as food and utility input cost inflation continue, and we will look for an update on inflationary pressures that the company is facing.
“Management said at the full year results that it remains committed to its 17.3-18.3% long-term margin target, but admitted it had been pushed out a few years, and we will look for further guidance here.”
The company opened 41 new sites in 2012, and completed its refurbishment programme, with a further 10 conversions/refurbishments.
Rollo said: “The company had opened 6 new sites at the Q1 update and we expect 40 additions for the full year, which is in-line with previous company guidance. The company’s triennial pension review began on 31st March and the company said at the Q1 results that it was hoping to say something at the H1 results, although it does not expect to have concluded negotiations. We will look for any guidance on cash costs and how negotiations are going. We expect the deficit to increase significantly and we think it is unlikely the company will resume a dividend until the issue is resolved.”
