A leading City analyst has downgraded Mitchells & Butlers, the managed pub group, ahead of the release of its pre-close trading update later this week saying that its recent disposals could be dilutive and the reinvestment programme could take time.
In a note entitled “Mitchells & Butlers: Hard work still to come”, Morgan Stanley has cut its target price by 10p to 340p and rates the stock as equal weight.
It said that the recent disposal of 400 pubs to Stonegate Pubs, backed by TDR Capital, had improved the estate mix and this should ensure market share gains, leaves it with a stronger balance sheet and could see a return to dividends.
But Jamie Rollo and his team also warned: “It is c. 20% dilutive to EPS (our forecasts are offset by accretion from the Ha Ha deal), management may struggle to reinvest the cash given the lacklustre history of organic pub additions, and the shares do not look particularly cheap without this reinvestment.”
Commenting on the group’s expansion plans, the analyst said: “MAB aims to increase its six drive brands from c. 900 to c. 1800 units. Net of internal conversions it needs to add c. 750 sites.
“If acquisitions are not forthcoming it will need to rely on organic additions, an area where it has only added c. 10 a year historically. Even at Wetherspoon’s best-in-class 50 pa, this could take 15 years.”
Morgan Stanley added that M&B’s price earnings ratio had increased from 9x a year to more than 10x, despite this it prefers JD Wetherspoons 12% on a free cash flow basis.
