Leading analyst Douglas Jack has forecast that Mitchells & Butlers (M&B) will report a 2% rise in H1 pre-tax profit and 1% rise in like-for-like sales at its interim results on 22 May.
Jack, of Numis, said it reflects “cautious guidance” but added that the combination of new IT systems, a focus on raising service standards and an improving economy “should be starting to create some traction in relation to like-for-like profits”.
Issuing an Add recommendation at a Target Price of 525p, Jack said: “LFL sales rose 2% in Q1 (our full year forecast is 1%). All the growth during the first four months occurred in December and January, with the favourable impact of easy comps in January having the greatest impact. With similarly easy comps occurring in March, LFL sales should have remained positive in Q2, implying upside risk vs our forecasts and consensus.
“EBIT margin guidance for 2014E is flat to slightly down (our full year forecast is for -14bps), reflecting a focus on cash rather than P&L margins (promotional activity was slightly higher in January this year). However, an improving economy should support pricing and M&B should be starting to gain cost savings from its new IT systems, which should be in over 400 pubs.
“Ten new outlets opened during the first 17 weeks. Having opened 16 new sites in 2013, 30 new sites should open in 2014E, followed by 40 in 2015E. Target EBITDA returns have been increased to 14-15% from 13% on freeholds and to 25% from 18% on leaseholds.
“We forecast M&B to generate £160m pa of FCF post maintenance capex (9-10% yield), of which £50m should fund the pension deficit, £55-60m should be expansionary capex, leaving c.£50m potentially available for dividends. After all the company’s net debt/EBITDA is c.4x, with £260m+ of cash at PLC.”
He added: “M&B’s 9.5x EV/EBITDA rating (8.3x if higher bond yields wipe out the pension deficit, worth £1.20/share) is not excessive, in our view, on forecasts with upside potential. We believe the catalysts are: LFL profits and expansion picking up (2015E); dividends resuming (this autumn) and the £0.6bn pension deficit falling (2015E).”
