M&C Report reports from Mitchells & Butlers’ (M&B) analysts’ conference call following the release of its Q3 interim management statement (IMS) this morning:
New CEO
Chairman Bob Ivell stressed that there’s been no change in the situation regarding the appointment of a new chief executive. “It’s nothing about a lack of candidates. What we’ve said all the time is we have two strong candidates and we have a preferred candidate. Maybe the delay is not necessarily on our side. It’s just a case of getting to the right point.” Ivell explained that the wording of the statement on the issue in the IMS had changed simply because he was subject to “Mickey taking” after its half-year results quoted him saying he was “pleased” with the progress.
Weather and ‘webbed feet’
“A lot of our provincial-type sites are sites with big gardens, with eating and drinking facilities outside,” said finance director Tim Jones. “This time of year would hope to have these full and packed with people drinking and eating. With the way the weather’s been we haven’t seen that.” However, Ivell said customers have become more “philosophical” about the weather. He pointed to an improvement in like-for-likes (+1.6%) in the final nine weeks of the reporting period. “I think now most customers have grown webbed feet,” he said. “They’ve become more resilient. As customers go out more people are just saying ‘sod it, we’re going out anyway’.”
Improved performance
Special occasions such as Father’s Day also helped lift sales in the later part of the quarter, Ivell added. Jones said the recovery “wasn’t particularly dominated by food”, with likes for likes in drinks and food up by 1.4% and 1.8% respectively. Euro 2012 also helped lift drink sales in the nine weeks, Jones added - Ivell said the tournament proved to be “slightly negative for us [but] probably not as negative as we anticipated”. Asked if he was confident about maintaining the 1.9% like-for-like sales growth to the end of the financial year, Jones said: “If we got some decent weather we are confident that will come through.”
Variations by region and brand
Jones said trading in London “remains very strong”, with like-for-likes much higher than elsewhere. Other regions have been “more lackluster”, with the north east and the north west the weakest. Ivell said its mostly London-based Nicholson’s and Castle sites are “performing best on a year-on-year basis at the moment”. He added: “Pubs tend to be outperforming restaurants at the moment. We are experiencing that.”
M&B’s value brands
“We said we felt there was a number of things that need to be done with these brands and we’ve begun to implement new activity,” said Ivell. “We are starting to see some green shoots from the activity. It’s early days yet but we are starting to see some really interesting results from that.”
Jubilee and Olympics
“The Jubilee numbers were good for us,” said Ivell. “London was very, very strong through that period.” He added: “I’m not really sure what affect the Olympics will be. London should do well but it’s very difficult to understand how the rest of the country will react.”
Ways of Working
M&B said trails of its Ways of Working operations management process are “progressing well”. Ivell said guest satisfaction levels are continuing to increase and complaints are falling. “From my experience in the sector that’s a very, very good indication of what will come after,” he added.
Openings/b>
Jones said M&B is “still on track” to open or convert about 55 sites for the full year; 42 were completed in the half-year, and he said a couple were completed in the quarter.
Wi-fi
Ivell said he was confident that the free wi-fi rollout would be completed by the end of the year; the service is currently in more than half of its estate.
Analysts
Geof Collyer at Deutsche Bank issued a Hold recommendation for M&B and trimmed his forecast. “There is still no apparent progress on a new CEO or any new non-executive directors. This remains the major impediment to recruiting new investors in our view,” he said.
“Weather is still playing havoc with LFLs – but London exposure is helping to offset London & South East exposure is helping to offset trading volatility caused by the weather. Around 40% of M&B pubs are in the South East, vs. 55% for Greene King. Given the variability of year-ends, the longer term picture remains a better way to view the underlying LFLs momentum.
“Margins were -71 bps in H1, and management is expecting an H2 improvement, with possibility that margins could be flat. We are looking for reported margins -23 bps for year, or -33 bps on an underlying basis, stripping out the impact of last year’s disposals. Sales after 42 weeks were a bit below Deutsche Bank’s estimate so we have shaved our estimates for this year by c2%, which flows through into a sub 3% EPS downgrade for 2012E – 2114E.”
Simon French at Panmure Gordon reiterated his Sell recommendation at a Target Price of 225p. “M&B has reported LFL sales growth of 0.4% for the 14 weeks to July (+1.6% in the most recent nine weeks) to bring YTD LFL sales to 1.9%, in-line with our estimate of c1.5%,” he said.
“We expect no change to consensus expectations of £170m PBT (30.9p EPS). The stock trades on a CY 2012E adjusted EV/EBITDAR of 7.2x and we reiterate our Sell recommendation, reflecting relatively weak top-line growth and shareholder/governance issues, and 225p Target Price, implying c11% downside potential.”
Paul Hickman at Peel Hunt issued a Hold recommendation. He said: “Three-quarters of the way through its year, Mitchells is on course for 10% earnings growth (admittedly in a 53-week year), and volumes have recovered in the last nine weeks with special occasions such as Father’s Day more than compensating for a negative football effect.
“But our concerns remain: organisational changes, the lack of a CEO, uncertainty on shareholders’ intentions, an irregular board, and no dividend. The company is still some way off restoring the market confidence that would repair its discounted rating.”
