A leading analyst has said that he expects LFL trading to have picked up over the last two months at Mitchells & Butlers (M&B), due to an improved sector backdrop, investment, IT roll out and efforts to improve service standards
Douglas Jack at Numis said that following recent strength, he was moving his recommendation for the company to Add from Buy.
He said: “We expect to hold our 2014E forecasts, which assume 1% LFL sales and flat EBIT margins. Over the medium term, we believe there is good scope for the shares to recover through LFL sales picking up, expansion accelerating, dividends resuming (this autumn) and the £0.6bn pension deficit falling.
“Our revised target price (525p, up from 500p) is consistent with our 10.7x EV/EBITDAR target valuation for the sub-sector, supported by M&B’s estate quality and growth potential.”
The group’s LFL sales grew by just 0.1% during the first 8 weeks (October and November), but Jack said they should subsequently have improved to 1-2%, reflecting a better trading backdrop for the sector, investment, IT roll out and efforts to improve service standards.
He said: “With the focus on cash rather than P&L margins, some of the savings from labour scheduling and lower food cost inflation should be passed on to customers. For example, the lowest priced meal at Crown has fallen to £3.69 from £4.19 (aided by new products replacing red meat). In addition, for a limited period only, Harvester is offering 20% off on a minimum spend of £25, Toby is offering 20% off and Sizzling is offering 25% off.”
EBIT margins grew 45bps in 2013, largely as a result of higher spend per head, better food purchasing, back-of-house cost savings and lower pre-opening costs.
Jack said: “Further upside to margins rests on LFL sales picking up as well as utilising new stock, labour scheduling, EPOS and hand-held ordering/payment systems (for which the roll out should cost £33m over 30 months).
“Having opened 16 new sites in 2013, 35 new sites should open in 2014E, followed by 50 in 2015E. Target EBITDA returns have been moved up from 13% to 14‐15% on freeholds and from 18% to nearer 25% on leaseholds.”
