Leading sector analyst Douglas Jack says Mitchells & Butlers’ (M&B) current valuation does not reflect the quality of its estate, and he expects trading to be “at least in line” at its year-end trading update next Friday (28 September). Issuing a Buy recommendation at a target price of 350p, Jack, of Numis, said: “We expect trading to be at least in line, supported by reasonable LFL trading against easy comparatives in Q4. Combined with easing cost pressure, this should have enabled margins to be at least flat in H2. “In our view, M&B’s 9x P/E (8x EV/EBITDA) rating does not reflect the progress that is being made, nor the quality and potential of its estate.” Jack pointed out that to achieve his +1.5% like-for-like sales assumption, like-for-likes needed to be flat for the last 10 weeks. “This should be possible: the company achieved 1.6% in May/June amid dire weather (70% of the estate has beer gardens); LFL comparatives ease from 3.1% for Q1-3 to 0.5% in Q4 (the riots took c.50bps off Q4 LFL sales last year); and September’s weather has been good.” He added: “EBIT margins should have been flat in H2, having fallen 70bps in H1, due to falling external cost inflation and c.£35m of cost savings (in menu, buying, logistics, IT and centrals). “We expect margins to grow slightly in 2013E, based on assumptions of 1.5% LFL sales, slowing food, utility and labour cost inflation, supported by recent operational initiatives and easing LFL comparatives (largely weather-related). “M&B should have opened at least 55 outlets this year, of which c.70% are in leisure/retail parks. Cash returns in these leasehold sites averaged 26% in H1 (undermined by timing), but returns should pick up as these sites mature. “We expect to hold our full year forecasts (2012E PBT £174m vs consensus £169m). In our view, the current valuation does not reflect the quality of M&B’s estate and the potential for margin growth/dividend resumption. The recruitment of independent non-executives should be the next step in re-rating the stock.” M&B is still looking to appoint some independent non-executive directors following the announcement that Marston’s chief operating officer Alistair Darby is to become its new chief executive. This morning the firm announced more changes to its board with news that Doug Evans is to step down as a company director at its AGM on 31 January. Meanwhile, Doug McMahon, a representative on the M&B board of Piedmont, the investment vehicle of Joe Lewis, has appointed another Piedmont representative Richard McGuire as his alternative from 1 October.