Pub operators face a horrible 2012 as their costs and taxes rise, while their hard-pressed customers spend less. These challenges are even more worrying for a company in the throes of a strategic overhaul and management seemingly in a state of perpetual revolution. The company in question is Mitchells & Butlers (M&B), whose shares we tipped as a buy in brighter times (325p, 28 October 2010). However, things look very different now.
- Reputation as quality pubs operator
- Has some strong brands
- Management upheaval
- Strategic uncertainty
- Piedmont's shareholding
- Worrying outlook for consumers and costs
The revolving door in the boardroom, thanks largely to the presence of 23 per cent shareholder Piedmont, a vehicle controlled by billionaire investor, Joe Lewis. Since last month, M&B is run by Bob Ivell, who moved from being interim chairman to executive chairman following the departure of interim chief executive, Jeremy Blood. In turn Mr Ivell has now overhauled management internally. The idea is to stream line operationsand cut costs, but this nevertheless represents yet more disruption and the loss of some very experienced hands.
The boardroom itself looks rather too stream line for such a large company, although the five-strong group of directors is searching for a full-time chief executive and the most recent reorganisation may have effectively lined up candidates for the job. On the plus side, Mr Ivell has plenty of experience, including stints at Whitbread and The Restaurant Group. However, instability at the top of a company raises questions about how morale is holding up down the operational line, especially as M&B's managers attempt to steer through major changes.
| Mitchells & Butlers (MAB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 226p | MARKET VALUE: | £925m | |
| TOUCH: | 226-227p | 12-MONTH HIGH/LOW: | 366p | 215p |
| DIVIDEND YIELD: | nil | PE RATIO: | 8 | |
| NET ASSET VALUE: | 270p | NET DEBT: | 174% | |
| Year to 25 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 1.91 | -238 | -43.7 | 4.55 |
| 2009 | 1.96 | -10 | 1.0 | nil |
| 2010 | 1.98 | -127 | -20.6 | nil |
| 2011* | 1.78 | 152 | 27.0 | nil |
| 2012* | 1.79 | 160 | 28.7 | nil |
| % change | Nil | +5 | +6 | – |
Normal market size: 10,000 Matched bargain trading Beta: 1.0 *Peel Hunt forecasts (Profits & earnings before amortisation charge) | ||||
M&B's big plan is to use £500m of proceeds it has raised from the sale of peripheral assets to grow its most successful brands, which include Harvester and Toby Carvery. M&B says cash returns on capital spending for expansion are running at over 20 per cent and that £75m had been invested over the financial year. That's encouraging, but maintaining that pace will be tough.
There have already been signs of slowing sales growth and pressure on profits. True, we will get a better picture when M&B announces its 2010-11 results on Tuesday, but there is every reason to be nervous about Christmas and 2012's trading.
Most of the UK's large pub groups are focused on food-led growth, and that means competition to keep prices down may eat into profit margins next year. M&B has changed its menus to lessen the impact of rising costs, but there is only so much it can do.
Meanwhile, a low-ball opening bid at 230p by Piedmont, which was withdrawn last month, has underpinned M&B's share price. Piedmont can't bid again till April. But if it does, there is every reason to think its offer would be still lower if trading had deteriorated. What's more, as long as Piedmont's presence creates uncertainty among investors, M&B's shares are likely to remain rated at a discount to shares in competitor companies.
