Mitchells & Butlers’ (M&B) recent acquisition of four freehold London sites from Convivial Pubs is evidence of the managed operator’s increasing growth ambitions, and the firm could exceed its expansion target over the next few years, according to a leading analyst.
Douglas Jack at Numis pointed out that the acquisition of the sites, for more than £13.3m, are to be included within the expansion target of 30 new pubs in 2014, “so there is no need to change forecasts at this stage”. “However, this and our recent meeting with the company point to increasing growth ambitions, with positive implications for 2015E in particular.
“For the four-pub acquisition, M&B will not provide details on the exact price and EBITDA multiple. Also, the transaction is too small to require forecast changes. However, the deal does point to increasing growth ambitions. The target for 30 new sites in 2014E could be beaten, with 40 expected in 2015E and 50 in 2016E.”
Jack issued an Add recommendation and 500p Target Price for M&B, whose shares he said are “lowly valued” even though they trade at a premium to Spirit Pub Company. “We expect the company to have generated 9% earnings growth in 2013E despite limited expansion and LFL sales being flat (+0.4%).”
He said M&B has “gradual, but sizeable, recovery potential”.
“If M&B gets like-for-like sales traction from its service culture roll out, the upside through operational gearing is considerable. Similarly, if it can improve the ambiance of Harvester in leisure parks (the latest version opens in Nacton, Ipswich on 19 November), expansion potential would increase. Both factors are material influences on growth and the rating.
“In our pre-close meeting with company, management indicated that there were signs of traction from their service culture roll out. M&B also expects margin upside from new IT systems, although higher like-for-like sales will also be required to hit the long-term EBIT margin target of 18.4%.”
