Leading analyst Simon French has reiterated his Sell recommendation for Mitchell’s & Butlers (M&B) but increased his target price from 301p to 365p, saying the company is “potentially a compelling turnaround story”.
French, of Panmure Gordon, said: “M&B reported FY results c2% ahead of expectations driven by lower than expected interest costs. Margin performance was in line with expectations but current trading remains disappointing with LFL sales growth flat despite a significant London presence and a favourable trading backdrop.
“The resumption of dividend payments appears at least 12 months off and the group’s capital structure remains inefficient. All are solvable problems and M&B is potentially a compelling turnaround story. However, we think consensus is too optimistic and until earnings downgrades cease and there are genuine signs of an improvement in operating performance we think the shares warrant a discount to the peer group. We therefore reiterate our Sell recommendation but increase our Target Price to 365p (from 310p).”
French said M&B’s margin performance was in line with expectations but current trading “remains disappointing”, with like-for-like sales growth flat “despite a significant London presence and a favourable trading backdrop”.
“We estimate c25% of sales come from within the M25 where the group reports it is performing in line with Young’s & Fuller’s (c7% LFL sales growth) so that implies the rest of the UK is seeing LFL sales declines of c2.3%, led by its value brands. By way of comparison, Marston’s, which has little presence within the M25, has just reported 2.2% LFL sales growth.
“M&B has now reported essentially flat LFL sales growth for the last 60 weeks and therefore we find it difficult to share management’s optimism that these can suddenly accelerate to 1.5-2.0% in the current year particularly given trading will be impacted by the FIFA World Cup in June/July 2014 when we estimate LFL sales will be c-5% negating any impact of what is shaping up to be a strong Christmas and New Year trading period.”
He added: “We have essentially left our FY 2014E EBIT forecast unchanged at £314m (FY 2013A: £312m) which implies a LFL decline in profitability (flat LFL sales growth and c30bps decline in EBIT margin) more than offset by new site contribution tempered by a £2.0m IAS 19 charge through administration costs. Interest costs are expected to be flat YOY (step up in interest rate offset by lower average debt) to result in £186m PBT (35.5p EPS) compared to consensus estimates of £194m PBT. The acceleration in its growth strategy will only materially affect earnings in FY 2015E, when we now forecast c13% growth (a 2.6% upgrade) in earnings to £207m PBT (40.0p EPS).”
