Leading analyst Geof Collyer has reiterated his view that Mitchells & Butlers (M&B), the managed operator, has dropped to sixth place among the major quoted pub and restaurant companies ahead of its final results on 27 November.
Collyer, of Deutsche Bank, said: “At the 51wk stage, IMS, M&B’s underlying sales were +5.2% (+3.2% reported), with lfls +2.1%. The two-year aggregate (+4.8%) however for M&B has left it down in sixth place amongst the major quoted pub and restaurant retail businesses.
“The bullish view of this situation is that the new CEO could be coming into the group just as the performance has bottomed out. The bearish view is that the shares have risen by over +40% since the interims and are factoring a level of recovery that now has to be delivered by the new CEO to justify the group’s current rating, which, to us, is around fair value.”
Collyer, who issued a Hold recommendation for M&B, forecast that its margins would be down 33 bps on an underlying basis (ie: excluding disposals), implying flat H2 margins after the 70 bps fall in H1.
“Given the continuing structural mix shift with lower gross and net margin food sales remaining the key driver of performance – lfl food sales have been significantly ahead of lfl drinks sales for the past four years - we are not that fussed about the margin decline since the average sales and profits per pub have risen in nine of the past ten years. We will however be looking for signs that the investment programme is helping to offset this margin slide, although the £4-5m of additional rents from the leasehold retail and leisure park developments may prove a minor hindrance in this regard.”
He added: “We think that key areas of contention between some of the shareholders and management has been when to reinstate the dividend and how quickly the group can reinvest the rest of the 2010 disposal proceeds. Maybe the outcome of the pension triennial review will have an impact on this matter. Afterall, the board would not want to reinstate the dividend payment if it was unable to maintain the cover or indeed be unable grow it, once reinstated.
“It would be helpful for the group if the corporate governance situation has finally calmed down, although the two largest shareholders still own more than half of the group’s equity, with Elpida adding around 7m shares to its holding recently.
“This has probably reduced its average in-price to somewhere close to the current M&B share price. Certainly, the new CEO and new senior operating management team that have emerged following last year’s major restructuring could do with some much-needed stability on the main board to enable them to concentrate on making the new divisional platform work.”
